Fed Chief Jerome Powell and Billionaire Investor Warren Buffett Just Delivered the Same Dire Warning to Wall Street. History Paints a Compellingly Clear Picture of What Happens Next.

The S&P 500 index went through some tough times this spring as investors worried about the impact of President Donald Trump's tariffs on imports. However, as negotiations on tariffs happened and companies showed their resilience in a tariff environment, investors' concerns lessened, and the benchmark recovered the positive momentum that helped it score two consecutive years of gains. And today, after reaching record highs, the S&P 500 is heading for an increase of 13% this year.

This is led by growth company stocks, including artificial intelligence (AI) and tech stocks, amid optimism about lower interest rates and strong corporate earnings. The Federal Reserve cut interest rates in September and indicated two more would come before the year's end. As for earnings, in the second quarter, about 80% of companies beat analysts' revenue and profit estimates, according to BlackRock.

Against this bright backdrop, though, two market experts have delivered the same dire warning to Wall Street. I'm talking about Federal Reserve Chair Jerome Powell and billionaire investor Warren Buffett. And history paints a compellingly clear picture of what's to come.

Image source: Getty Images.

All eyes on Powell

First, it's important to note that all eyes were on Powell in recent months as investors waited for the September interest rate decision and the Fed chair's general views on the economy. Investors hoped for a rate cut, and more to come, as lower borrowing costs make it easier for companies to borrow and expand -- and lower rates also favor consumer spending. All of this is positive for companies' earnings and, therefore, their stock performance.

Meanwhile, all eyes are always on Buffett thanks to his investing successes over the long term. He's led Berkshire Hathaway to market-beating returns for almost 60 years thanks to his ability to identify quality stocks, get in on them at reasonable prices, and patiently wait for them to take off.

So, what message have Buffett and Powell both delivered in recent times? Buffett's message came through one simple action: building up his cash pile to record levels. It's now at $344 billion after reaching more than $347 billion a few months ago. This shows that Buffett has favored setting cash aside over buying stocks, and when he does this, it means he doesn't see many interesting buying opportunities. Now, this doesn't imply that today's companies have terrible businesses. It just suggests they are trading at levels that are too expensive.

Powell's recent words support this. In a speech late last month, the Fed chair said, "Equity prices are fairly highly valued." He tempered this by saying financial stability risks aren't high right now. But the bottom line, and what should be of concern to investors, is that stocks are looking pricey these days.

The Shiller CAPE ratio

And to illustrate these warnings from Buffett and Powell, we can look at the S&P 500 Shiller cyclically adjusted price-to-earnings (CAPE) ratio. This metric considers prices and earnings per share over a 10-year period. It's a reliable measure because, by covering a period of years, it accounts for fluctuations in the economic environment.

The S&P 500 Shiller CAPE ratio has reached 36, a level it has surpassed only twice before throughout history.

S&P 500 Shiller CAPE Ratio data by YCharts. CAPE Ratio = cyclically adjusted price-to-earnings ratio.

And history paints a clear picture of what's ahead. In the past, after reaching such levels, declines in the S&P 500 followed.

S&P 500 Shiller CAPE Ratio data by YCharts. CAPE Ratio = cyclically adjusted price-to-earnings ratio.

What does this mean for you as an investor right now? It's impossible to predict exactly when declines will happen, but the market never rises or falls in a straight line forever. Periods of gains and losses are part of normal market cycles. So, the S&P 500 will fall at some point, but the good news is, as history also shows us, it will rebound and go on to gain.

So, investors should continue to buy stocks throughout market cycles -- but only at reasonable prices. Today, the stock market as a whole may be expensive, but you can still find individual stocks that trade for acceptable or even low prices. The warnings from Powell and Buffett are ringing out loud and clear, but if you shop wisely for stocks, you can win during any market environment.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends BlackRock. The Motley Fool has a disclosure policy.