The stock market is heading into the last month of a banner year. Benchmark The value of the S&P500(SNPINDEX: ^GSPC) has advanced 27% in 2024, putting the index at its best performance in the 21st century. reduce interest ratesand closed at a new level on Dec. 2.
Investors must now answer a difficult question: Is it wise to buy stocks with the S&P 500 on its record? On the one hand, the market has been doing well from the ground up. From January 1970 to December 2023, the S&P 500 returned an average of 9.4% in the trailing 12 months, but returned 9% annually over that period, according to JPMorgan Chase strategist Madison Faller.
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On the other hand, a big run in the S&P 500 has left many stocks trading at old prices, and Warren Buffett recently sent investors a $150 billion warning. Here are the important points.
Warren Buffett he is considered to be one of the richest people in the world. Under his leadership, Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) has seen its Class A shares increase at 20% per year since the mid-1960s, compounding twice as fast as the S&P 500. Buffett’s many purchases and stock purchases helped make this possible, including positions in Coca Cola and American Express bought with pennies on the dollar.
Today, Buffett runs Berkshire Hathaway’s $300 billion portfolio, and recent capital allocation decisions can be interpreted as an ominous warning to investors. In particular, Berkshire has been selling stocks for the past seven quarters, and the cumulative sales during that period exceeded $150 billion. Implications: Buffett is struggling to find value stocks after the market collapses.
The S&P 500 trades at 22 times forward earnings, yielding a five-year average of 19.6 times forward earnings and near its highest price since April 2021, according to FactSet research. Leading P/E ratios are closely related to long-term underperformance, and recent multiples imply annual returns of 3% over the next three years, says Chief Economist Torsten Slok at Apollo Global Management.
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Investors should factor in Buffett’s recent capital allocation decisions. By the way, Berkshire is worth $1 trillion, so buying stock in smaller companies isn’t going to move the needle. Furthermore, Buffett has agreed to avoid technology stocks because he doesn’t understand the sector. Taken together, these restrictions leave Berkshire with limited sources of income.
Buffett highlighted the problem in his most recent letter. “There are only a handful of companies left in the country that can move the needle at Berkshire, and they’ve been consistently singled out by us and others,” he wrote. Buffett also discussed global stocks in his analysis. “Outside the US, there are no candidates meaningful Berkshire’s investment options. All in all, we did no the ability to do very well.”
Here’s the big picture: Most stocks are historically expensive, so investment opportunities have been hard to come by. Berkshire being a stock marketer for the past seven quarters is proof of that. But retail investors have more opportunities to send money than a trillion-dollar company like Berkshire.
Therefore, Warren Buffett’s warning of $150 billion should not be seen as a mandate to avoid the market, but as a reminder that always (eventually) calculating is necessary. In this case, without a doubt the current location should be careful. A small bump in the economy or politics can send the S&P 500 into a correction or bear market. But I think it would be a mistake to avoid the market right now.
I’ll close with this quote from legendary investor Peter Lynch. “More money has been lost by investors who planned to improve, or tried to anticipate improvement, than what was lost in the management itself.”
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American Express is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has no responsibility in any of the matters mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, FactSet Research Systems, and JPMorgan Chase. The Motley Fool has disclosure process.
