The Stock Market Is Sending a Rare Historical Warning. Warren Buffett Says Investors Should Make This 1 Move.

After years of seemingly unstoppable growth, major market indexes have faltered. The S&P 500 (SNPINDEX: ^GSPC), Dow Jones Industrial Average (DJINDICES: ^DJI), and Nasdaq Composite (NASDAQINDEX: ^IXIC) all slipped into the red over the last month, each down between 1% and 2%, as of this writing.

There's no shortage of reasons why the market is struggling. New fears around AI are rattling tech stocks, oil prices are reaching new highs, uncertainty in the bond market is pushing yields to dangerous thresholds, and it's all but certain the Federal Reserve will hike interest rates this week.

While the market has remained resilient through much of this volatility, it's also been sending a quiet warning in the background. The good news, though, is that Warren Buffett has some timeless advice for moments exactly like this.

Image source: The Motley Fool.

Valuations are nearing dot-com bubble levels

The S&P 500 Shiller CAPE Ratio is a metric that tracks the broader market's long-term valuation. Like any metric, it's not perfect and can't predict the future. That said, its warnings have preceded some of the most severe bear markets and recessions in history.

The higher this figure climbs, the more likely the market is overvalued. It reached its first major peak in 1929, just before the Great Depression. About 70 years later, it surged again during the dot-com bubble. It hit a record high of 44 in late 1999, around four months before the bubble officially popped. Right now, this ratio is at just over 40.

S&P 500 Shiller CAPE Ratio data by YCharts

Although it's incredibly rare for this metric to surpass 40, it doesn't mean a market crash is imminent. However, it does suggest that the market is nearing valuation levels seen only during the dot-com bubble.

Warren Buffett's single best piece of advice right now

During the dot-com boom, many investors were more excited about the internet's potential than they were concerned about a bubble. Tech stocks were unstoppable, initial public offerings (IPOs) were lucrative, and there was no shortage of hype around this new technology.

Then, in a 1999 Fortune article, Warren Buffett warned that many investors were likely buying for the wrong reasons. He used the airline industry as an example, noting that while air travel had transformed society, 129 airlines had gone bankrupt over the previous 20 years. The dot-com bubble later proved his point, as hundreds of tech stocks crashed and burned in the early 2000s.

"The key to investing," Buffett advised, "is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."

As concerns around an AI bubble mount, this advice is perhaps more important than ever. No matter how transformative a technology may be, it's crucial to ensure you're only investing in quality companies with strong foundations.

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.