Warren Buffett's $347 Billion Warning to Wall Street Is Ringing Out Loud and Clear. History Says This Happens Next.

The bull market roared on last year, and investors favored high growth stocks in particular -- with the idea that these sorts of players would excel in a potentially lower interest rate environment. And many of these investor favorites are involved in artificial intelligence (AI), a booming field that could drive growth well into the future.

But, amid all of this optimism, Warren Buffett began to construct a significant warning to Wall Street. The billionaire investor didn't join the crowd and buy stocks hand over fist. He selectively made some purchases -- for example, adding Constellation Brands to the Berkshire Hathaway portfolio in the fourth quarter. But overall, he was a net seller of stocks, even reducing positions in top holdings Apple and Bank of America last year. And at the same time, Buffett built up a record level of cash -- and that level has marched higher into the new year, totaling more than $347 billion as of the end of the first quarter.

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In that period, Buffett was a net seller of stocks for the 10th consecutive quarter, extending the billion-dollar warning into this year. Now let's take a look at history to see what stocks may do next.

Image source: The Motley Fool.

Why Buffett's actions count

First, though, let's consider why Buffett's words and actions are so important. The billionaire has led Berkshire Hathaway to a market-beating performance over 59 years, proving his ability to pick out a great stock and score an investing win. Clearly, he's done this numerous times and with many stocks, helping Berkshire Hathaway deliver a compounded annual gain of nearly 20% over the period -- that's compared to an increase of about 10% for the S&P 500 index.

To reach this level of success, Buffett has followed a few simple principles. He only invests in companies he understands, he buys stocks for reasonable prices, and he holds on for the long term. On top of this, importantly, Buffett doesn't jump into investing trends or follow the crowd during bull or bear markets. Instead, this investing expert invests throughout market environments -- when he finds opportunity.

Buffett wrote about opportunity in his 2024 shareholder letter, saying, "often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities."

Considering that comment and Buffett's investing moves, he likely didn't see last year as ripe with great potential buys. It's important to remember that stocks were getting expensive, and even today after recent losses, many remain pricey. A look at the S&P 500 Shiller CAPE ratio, a measure of stock prices along with earnings over a decade, illustrates this.

S&P 500 Shiller CAPE Ratio data by YCharts

This Buffett warning has happened before

Now, as Buffett's warning rings out loud and clear, let's consider what history says may happen next. We can do this because Buffett's warnings aren't new. In past years, Buffett's pile of cash has peaked on occasion, before declining in the following period as the top investor deployed some of the funds. The chart below shows that happening in 2007, 2017, and 2021.

Data Source: Statista.

Importantly, a look at S&P 500 performance in the year following each of those "Buffett warnings" shows the index declined. The S&P 500 fell 38% in 2008, 6% in 2018, and 19% in 2022. So, if Buffett's latest warning follows historical patterns, the S&P 500 could be heading for an annual decline next year.

Of course, it's important to keep in mind that declines aren't linked to Buffett's actions but instead to the general economic and corporate environment -- Buffett has just proven himself to be an expert at identifying risks ahead and taking appropriate action. And this appropriate action is refraining from buying stocks when they're too expensive and instead building up cash to deploy when opportunities arise.

So, if history is right, stocks might drop next year -- but this doesn't mean you should turn your back on investing. Instead, like Buffett, in any market environment, be on the lookout for quality stocks trading at interesting levels, seize the opportunity, and hang on for the long term. After all, over time, a few periods of declines here and there won't stop you from scoring an overall win.

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Bank of America is an advertising partner of Motley Fool Money. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.