Warren Buffett’s Berkshire Hathaway has consistently sold more stocks than it has purchased for the past 12 quarters, marking a notable trend despite the company holding a staggering $381 billion in cash and short-term investments as of the third quarter of 2025. This unprecedented selling period coincided with the S&P 500 entering a bull market in the fourth quarter of 2022, during which Berkshire Hathaway recorded net sales totaling $184 billion.
Buffett’s strategic approach to investment has led to remarkable success for the conglomerate, which saw its shares soar over 5,500,000% since he took control in 1965. This translates to an annual compounded growth rate of approximately 20%. However, the sustained selling spree raises questions among investors about Buffett’s outlook on the current market landscape.
One theory is that Berkshire is now so large that individual stocks have less impact on its overall financial performance, limiting the potential benefits of new purchases. Alternatively, it may suggest that Buffett finds current valuations too steep to justify further investments. The S&P 500 itself has been trading at historically high valuations, with an average cyclically adjusted price-to-earnings (CAPE) ratio of 40 as of November. This figure places the index among the most expensive valuations recorded since its inception in 1957.
The CAPE ratio, developed by economist Robert Shiller, offers a more nuanced perspective on stock valuation by averaging a decade’s worth of inflation-adjusted earnings, mitigating the effects of market volatility. Historically, the S&P 500 has demonstrated dismal returns in the aftermath of reaching a CAPE ratio of 40 or higher. In fact, there have been only 22 instances since 1957 when the S&P 500 recorded such high figures, with average returns sinking to nearly negative across one, two, and three-year timeframes.
Data reveals that after experiences of this nature, the S&P 500 has never netted a positive return over the subsequent three years, with declines ranging from 10% to as steep as 43%. This trend suggests the potential for significant downturns if current valuations persist without notable earnings growth.
Interestingly, while these historical patterns present a cautionary tale, they also highlight a key limitation of the CAPE ratio. It is constructed from backward-looking data, emphasizing the importance of future earnings growth that may alter the current trajectory. Over the past decade, the S&P 500 enjoyed a boost in net profit margins due to reduced corporate taxes and advancements in technology, trends likely to continue as artificial intelligence gains traction within businesses.
As such, some analysts posit that investors may be more tolerant of high valuation levels today compared to historical standards, with the hope that future advancements in earnings could help normalize the CAPE ratio without drastic declines in the index itself. Nevertheless, this does not negate the inherent risks associated with entering a market characterized by elevated valuations.
In light of these conditions, financial advisors recommend exercising caution. Investors are urged to avoid succumbing to the temptation of chasing momentum stocks that exhibit unrealistic valuations. Instead, a more judicious approach, akin to Buffett’s philosophy, is encouraged—focusing on well-researched investments and being proactive in selling any stocks that cause discomfort amidst the volatile market climate.
