Warren Buffett's $127 Billion Warning to Wall Street in 2024 Speaks Volumes About the Current State of the Stock Market

On Wall Street, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett often has the pedestal to himself.

Since taking over as Berkshire's CEO in the mid-1960s, he's overseen a scorching-hot aggregate return in his company's Class A shares (BRK.A) of more than 5,663,000%, as of the closing the bell on Dec. 4. When you run circles around the stock market's most-followed indexes, you tend to draw a lot of attention from the investing community.

Something else that's endeared professional and everyday investors to the Oracle of Omaha is his generally open-book approach. For roughly a half-century, Buffett has freely spoken his mind about the U.S. economy and stocks during annual shareholder meetings, as well as in his annual letter to shareholders.

But investors will occasionally find that Buffett's long-term optimism doesn't always mesh with his short-term trading activity.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

The Oracle of Omaha sends an unmistakable $127 billion warning to Wall Street

For decades, Warren Buffett has represented a source of unabashed optimism for the stock market and has frequently warned investors not to bet against America.

Although Buffett isn't someone who attempts to time the market with his trades, he's well aware that the U.S. economy spends considerably more time expanding than contracting. He's used this simple numbers game to his advantage to help grow Berkshire Hathaway's operations and investment portfolio over six decades.

However, we've witnessed a markedly different investment approach from Warren Buffett and his top advisors, Todd Combs and Ted Weschler, over the last two years. Specifically, Berkshire Hathaway's consolidated cash flow statements show that Buffett's company has sold more stocks than it's purchased for eight consecutive quarters (Oct. 1, 2022 through Sept. 30, 2024).

While some quarters have featured minimal net-selling activity, stock sales have demonstrably ramped up this year. Here's a snapshot of net stock sales by quarter in 2024:

• Q1 2024: $17.281 billion in net-equity sales
• Q2 2024: $75.536 billion in net-equity sales
• Q3 2024: $34.592 billion in net equity sales

For those of you keeping score, this works out to $127.41 billion in net stock sales through the first nine months of 2024 -- and it's an unmistakable warning to Wall Street and investors that trouble may be brewing for the stock market.

The stock market has only been this pricey three times spanning 153 years

One of the Oracle of Omaha's investing "rules" that he simply doesn't bend on much, if ever, is his desire to get a good deal. He's been a value investor throughout his tenure at Berkshire Hathaway and he's demonstrated a willingness to sit on his hands until stock valuations make sense. Currently, the stock market is historically expensive.

S&P 500 Shiller CAPE Ratio data by YCharts.

One of the best valuation metrics that proves this point is the S&P 500's (SNPINDEX: ^GSPC) Shiller price-to-earnings (P/E) Ratio, which is also known as the cyclically adjusted P/E ratio, or CAPE Ratio. Whereas the well-known P/E ratio divides a company's share price into its trailing-12-month earnings, the Shiller P/E is based on average inflation-adjusted earnings over the previous 10 years. Accounting for a decade of earnings history minimizes the impact that shock events can have on traditional valuation tools like the P/E ratio.

On Dec. 4, the S&P 500's Shiller P/E closed at 38.87, which is its highest closing value during the current bull market.

The more important point is that this is only the third time since January 1871 that the S&P 500's Shiller P/E has neared or surpassed 39. Put another way, this is the third priciest stock market dating back more than 150 years.

Over the last century, there have been only six instances where the Shiller P/E Ratio topped 30, including the present. Each of the previous five occurrences were eventually followed by declines ranging from 20% to 89% in the stock market's major indexes.

JUST IN 🚨: Warren Buffett Indicator hits 200% for the first time in history, surpassing the Dot Com Bubble and the Global Financial Crisis pic.twitter.com/w0NV4RaMw7

-- Barchart (@Barchart) October 22, 2024

However, the Shiller P/E isn't alone in cautioning that stocks are pricey. The so-called "Buffett Indicator" blasted to a record high last week. This indicator, which Buffett championed in 2001, divides the cumulative market cap of publicly traded companies into U.S. gross domestic product (GDP).

Since 1970, the average for the Buffett Indicator is around 85%. In other words, the total value of all stocks has averaged about 85% the value of U.S. GDP. In October 2024, the Buffett Indicator topped 200% for the first time, and it closed at almost 208% on Dec. 4.

Even though Warren Buffett hasn't explicitly stated so, the writing is on the wall that stocks are pricey and value is almost impossible to find. This explains why he's been selling stocks hand over fist in 2024.

Playing the waiting game has been highly profitable for Buffett and Berkshire's shareholders

Admittedly, seeing the perpetually optimistic Warren Buffett sell more stocks that he's buying for eight consecutive quarters, and pick up this selling activity in a big way in 2024, has to be a bit unnerving for investors. But if you take a closer look at Buffett's investing track record, you'll discover that playing the waiting game is something he does especially well.

Earlier, I pointed to the disparity between peaks and troughs in the economic cycle and how Berkshire's chief uses this nonlinearity to his advantage.

Since World War II came to a close in September 1945, nine out of 12 U.S. recessions resolved in less than a year. Of the remaining three, none made it past 18 months. On the other end of the spectrum, most periods of economic growth over the last 79 years have surpassed 12 months, with two expansions enduring for more than 10 years. Buffett and his team are keenly aware of this disparity, and he's angled his investment portfolio and owned assets to take advantage of these long-winded expansions.

Image source: Getty Images.

Just as the Oracle of Omaha plays this simple numbers game with the U.S. economy, he's positioned Berkshire Hathaway to take advantage of eventual price dislocations on Wall Street.

Arguably one of the best investments Warren Buffett ever made came shortly after the Great Recession. In August 2011, Buffett handed over $5 billion to Bank of America to shore up its balance sheet. In return, Berkshire Hathaway received BofA preferred stock yielding 6% annually, as well as warrants to purchase up to 700 million common shares of BofA stock at an exercise price of $7.14 each. In mid-2017, Buffett exercised these warrants and made a small fortune.

Being a net seller of stocks for eight straight quarters has ballooned Berkshire Hathaway's cash pile (which also includes cash equivalents and U.S. Treasuries) to a record $325.2 billion. When the next shock event occurs and/or stock valuations begin to make sense, it's a near certainty that Buffett will be putting his company's treasure chest to work.

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Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.