Warren Buffett Sends Investors a $184 Billion Warning. History Says the Stock Market Will Do This Next.

Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shares have increased over 5,500,000% since Warren Buffett assumed control in 1965, compounding at 20% annually. His patient, value-oriented approach to investing has been indispensable in achieving that success. The company has a stock portfolio worth more than $300 billion.

Ominously, Buffett and his fellow investment managers have consistently been net sellers of stocks since the S&P 500 (SNPINDEX: ^GSPC) entered a bull market in Q4 2022. In other words, Berkshire has sold more stock than it has purchased in 12 straight quarters. Its net sales totaled $184 billion during that period.

Berkshire's large cash position makes that an especially grim warning. The company held a record $381 billion in cash and short-term investments in Q3 2025, meaning Buffett sold more stock than he bought depsite having a tremendous amount of investable capital.

Investors need to ask themselves why. One explanation is Berkshire is already so big that very few stocks could move the financial needle for the company, and perhaps the ones that could are either too expensive or outside Buffett's circle of competence. Alternatively, Buffett may simply be concerned about the valuation of the entire stock market.

Image source: Getty Images.

The S&P 500 trades at a historically expensive valuation that portends a steep decline in the coming years

In November, the S&P 500 had an average cyclically adjusted price-to-earnings (CAPE) ratio of 40, one of the most expensive valuations in history. Whereas traditional price-to-earnings (P/E) ratios are calculated with earnings from the past year, CAPE ratios are based on the average inflation-adjusted earnings from the past decade.

Economist Robert Shiller developed the CAPE ratio as a more accurate way to value stock market indexes like the S&P 500. By averaging inflation-adjusted earnings from a 10-year period, the CAPE ratio provides a better perspective than the traditional P/E ratio because it smooths volatility that occurs naturally throughout the business cycle.

As mentioned, the S&P 500 had an average CAPE ratio of 40 in November. The index has only recorded a monthly CAPE ratio of at least 40 on 22 occasions since it was created in 1957. In other words, the U.S. stock market has been this expensive less than 3% in the last seven decades.

Unfortunately, the S&P 500 has usually yielded dismal forward returns when starting from such an expensive valuation. Shown in the chart below are the S&P 500's best, worst, and average returns over different time periods following a monthly CAPE reading of 40 or higher.

Data source: Robert Shiller.

The chart above contains two particularly important facts. First, after recording a monthly CAPE ratio of at least 40, the S&P 500 has never produced a positive return over the next three years. Instead, the index has declined anywhere from 10% to 43%.

Second, after recording a monthly CAPE ratio of at least 40, the S&P 500's average return has been negative over the next one, two, and three years. Indeed, the three-year average implies the index will decline 30% by December 2028.

Why the S&P 500's elevated CAPE ratio may be less concerning than it first appears

The CAPE ratio has an important limitation: It is calculated based on backward-looking data, but what actually matters to the market is how quickly earnings grow in the future.

The S&P 500's net profit margin expanded 4.4 percentage points in the last decade due to lower corporate tax rates and technological innovation. That trend is likely to persist in the years ahead as more companies adopt artificial intelligence tools.

For that reason, investors may have a greater tolerance for elevated valuations today than they did in the past. If earnings growth accelerates in the future, the S&P 500's CAPE ratio could moderate without a substantial drawdown in the index.

Having said that, there is no denying the S&P 500 is expensive by historical standards, and that will likely lead to volatile trading conditions even in the best-case scenario. Investors should err on the side of caution. Now is not the time to chase momentum stocks with absurd valuations. Instead, investors should be choosy (like Warren Buffett) about which stocks they add to their portfolios, and they should sell any stocks they feel uncomfortable holding through a drawdown.

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