Stock market strategies

Hamish Hodder: Warren Buffett’s Alarming Stock Market Prediction

Posted on by Andrew Packer

Stocks have delivered a fantastic year. The market has even bucked seasonal trends, trending higher in seasonally weak months. Year-to-date, the S&P 500 is up over 22%. That’s more than double its long-term average annual return.

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    • However, with markets near all-time highs, it pays to take a closer look at valuations. Historically, the S&P 500 has traded between 15 and 20 times earnings. For the past 15 years, stocks have been on the higher end of that trend.

    Today, the S&P 500 trades closer to 30 times earnings. That’s one of its most expensive valuations on record. While higher growth from AI could help bring that ratio down over time, it could be a sign of caution.

    That may also be why value investor Warren Buffett has been raising cash. Buffett has reduced his stake in Bank of America (BAC), down under the 10% reporting threshold.

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    He also sits on a record level of cash. That cash is currently earning a relatively high rate of interest, over 4%, invested in short-term Treasuries.

    Buffett has cited a potential change in tax rates as a reason to sell. Tax cuts passed by Donald Trump during his first term are on track to expire at the end of 2025.

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    • However, with markets at all-time highs, investors looking bullish, and pricey valuations, Buffett could just be taking some cash off the table. Investors with some big tech wins may want to scale back as well.

     

    To view the full reason for Buffett’s move to cash, click here.