Should You Really Buy Stocks With the S&P 500 Near Its Record High? Warren Buffett Has Excellent Advice for Investors.

The S&P 500 (SNPINDEX: ^GSPC) declined 19% earlier this year, but the index has since recouped most of its losses. The S&P 500 is currently less than 3% below its record high despite widespread economic uncertainty.

S&P 500 companies reported first-quarter earnings that were much better than expected, but consensus estimates for the next three quarters have been revised much lower. And while inflation has cooled since January, economists expect tariffs to raise prices and slow economic growth in the future.

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Is it really smart to buy stocks right now? Consider this advice from Warren Buffett, one of the greatest investors in American history.

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Be fearful when others are greedy, and greed is seemingly driving the stock market today

Warren Buffett once wrote, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful." He offered that levelheaded advice when the stock market crashed during the Great Recession. The environment was rife with fear at the time, but the stock market is in a very different place today.

Investors are decidedly greedy. The S&P 500 is within striking distance of its all-time high despite extreme uncertainty related to tariffs. The Trump administration has made very little progress in trade negotiations, with only a single finalized deal to date and less than a month until the 90-day pause on reciprocal tariffs expires.

Even if the Trump administration strikes deals that eliminate those reciprocal tariffs with every trading partner on the planet, the duties already imposed have raised the average tax on U.S. imports to 12.4%. That is the highest level since 1941. Economists expect tariffs to raise prices and slow economic growth, but the question is to what extent?

Answering that question would be hard under any circumstances, but it is impossible right now because the White House has yet to finalize the duties, and the president consistently tweaks his trade policies. Meanwhile, the S&P 500 currently trades at 21.6 times forward earnings, a rich valuation above the five-year average of 19.9 times forward earnings.

In short, despite tariff-related uncertainty and elevated valuations, the S&P 500 has nearly climbed back to a record high. That is a clear sign of greed, so investors should be cautious when making decisions. Pay close attention to valuations, buy smaller positions than you otherwise would have, and build a cash position to capitalize on the next drawdown.

Never pass on the opportunity to buy a quality stock at a reasonable price

Investors should never pass on the opportunity to buy a quality stock at a reasonable price. Warren Buffett elaborated on that idea in his 1996 letter to shareholders:

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten, and twenty years from now. Over time, you will find only a few companies that meet these standards -- so when you see one that qualifies, you should buy a meaningful amount of stock."

Some investors shy away from the market during periods of macroeconomic uncertainty. Recent events are a good example. The S&P 500 fell 10.5% over two trading days in early April after President Trump announced his "Liberation Day" tariffs. This was the fifth-worst two-day decline for the benchmark index since 1950.

Admittedly, the tariffs the president outlined were shockingly severe and may have led to a recession had they stayed in place. However, hindsight says the subsequent crash was an overreaction. Rather than panic-selling stocks, investors should have been buying shares of companies whose earnings are likely to be materially higher in the future.

Here is the bottom line: The stock market is undoubtedly in a precarious place right now. Tariffs and high valuations mean the risk is skewed to the downside, so any sign the economy is succumbing to stagflation -- a possibility that has many economists concerned -- may lead to an abrupt and sharp decline. Nevertheless, investors should always buy a quality stock when it trades at a sensible price.

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Trevor Jennewine 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.