Investing

Warren Buffett's Potential Warning Signal Could Be Trouble for the S&P 500 (SPX)

Joey Frenette

Published: November 25, 2024 10:11 am

Warren Buffett’s growing cash pile, now at a towering $325 billion, is seen as a significant warning signal for some investors who may find themselves overinvested in equities. Undoubtedly, Warren Buffett and Berkshire Hathaway (NYSE:BRK-B) have shown they’re more than comfortable sitting on a mountain of cash for a lengthy time if there are limited opportunities in stocks.

Given U.S. Treasury bills (T-Bills) have been the most appealing they’ve been in several years, it can make sense to settle for slightly sweeter rates to be had with the risk-free investment option rather than take on risk with stocks at a time when the equity risk premium is a tad below that of historical averages.

In essence, if there’s less prospective return to take on risk, perhaps not taking any risk with a big chunk of one’s portfolio is the smart move. Though, it is a rather boring one! But does that mean investors should ignore Berkshire’s soaring cash pile? Probably not. The stakes seem higher after the stock market’s latest upside surge.

Key Points About This Article

• Warren Buffett’s heading into the new year with a record cash pile.
• The S&P 500 may not be headed for a big plunge, but its total returns could have the potential to be far less impressive.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Warren Buffett’s cash pile keeps swelling to record levels

Recently, Lee Jackson had a sitdown with Doug McIntyre to give his take on Buffett’s recent behavior, noting that his cash hoard may signal something ominous for the S&P 500 (SPX), which is currently flirting with new all-time highs. 

Undoubtedly, Buffett has been a big cash holder for years now. But, as Lee pointed out, Buffett has “never had this much cash.”

And while Buffett has shot down any attempts to time the markets over the near term, I think it’s hard to ignore the fact that the Oracle of Omaha has been pretty successful steering clear of some historical nasty blow-ups, raising cash well ahead (oftentimes a bit too early) of a nasty market sell-off, and taking advantage of the market bargains that follow.

Another legendary money manager, Dave Einhorn, admires Buffett’s knack for timing markets by raising cash when stocks are expensive and buying them up when they’re on sale.

“One could argue that sitting out bear markets has been the underappreciated reason for his outstanding long-term returns.” Einhorn said. 

I couldn’t agree more. Big money may be made in bull markets, but big money is lost in bear markets. By staying the course during bull markets and lightening up when the bull gets long in the tooth, setting the stage for the bear’s return, Buffett has been able to play the long game effectively.

Like Buffett, Einhorn sees the stock market as getting expensive. Though he’s not going big on the shorts, he’s one of the big names who sees Buffett’s cash hoard as a potential concern. If Buffett’s selling activities aren’t a red flag, it’s a yellow flag and one that should cause market participants to proceed with caution.

Is Buffett and Berkshire done raising cash? Or are there more record levels ahead?

The big question for investors is whether the cash pile will swell further going into 2025 or if Buffett will start making up for lost time by scooping up some deals in markets. If the cash levels keep rising to new records, perhaps responding by de-risking one’s portfolio would be a good idea. Of course, I wouldn’t dare bet against markets, regardless of how expensive pundits believe it is.

While Berkshire has bought some things of late, most notably Domino’s (NYSE:DPZ) and Pool Corp. (NYSE:POOL). Lee views Berkshire’s Domino’s purchase as a “totally defensive play.” And I think he’s right on the money.

A pizza delivery is a fairly low-cost way to feed a large household. The larger the family, the greater the value proposition of a Domino’s delivery.

Additionally, Domino’s has done an incredible job communicating its value proposition amid inflation. With occasional promotions and loyalty programs that offer added savings for those who seek it, Domino’s stands out as a defensive bet and one that can stand tall even if the economy were to experience a slow pace in the new year and beyond.

The bottom line

So, is Buffett’s record cash pile a warning of something concerning for the broader market? It could be. Either way, I’d not ignore the move and the nature of his stock bets (are they defensive or more discretionary?) moving forward.

Further, just because Buffett is heavy in cash doesn’t mean the S&P 500 could crater from here. Perhaps it’ll be an upward trajectory for the S&P 500, but one with a shallower slope (think 2-4% returns annually).