Investing

Buffett's Curious Behavior Suggests the S&P 500 (SPY) Is in Trouble

Rich Duprey

Published: December 2, 2024 12:35 pm

Since becoming CEO of Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) in the mid-1960s, Warren Buffett has obliterated the market’s returns. Where the S&P 500 generated cumulative returns of 31,233% for a compound annual growth rate rate of 10.2%, the Oracle of Omaha generated 4,384,748% cumulative returns, or nearly double the index’s CAGR at 19.8%. 

That means if you had invested just $1,000 in Berkshire Hathaway back then and then did nothing else, today you would have over $43.8 million.

There is a reason Buffett is called the Oracle of Omaha and tens of thousands of investors flock to Nebraska every year for the Berkshire Hathaway annual shareholder meeting hoping to pick up pearls of his investing wisdom.

24/7 Wall St. Key Points:

• Even after making a couple of surprise stock purchases this month, Warren Buffett is keeping most of his powder dry with a massive cash hoard of $325 billion.
• The stock market is trading a very elevated valuations with the S&P 500 (SPY) going for 30 times earnings compared to historical averages that typical trade for a third less.
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Buffett is a patient investor as he waits to find a good company trading at a good price. As he once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Just this month he bought $550 million worth of pizza shop Domino’s (NYSE:DPZ) and $145 million worth of Pool (NYSE:POOL), a pool equipment company. Both have been excellent businesses over the years, and equally important, outstanding dividend stocks. Although Berkshire Hathaway itself doesn’t pay a dividend, Buffett likes when his businesses send him a check. Over the past decade, both companies have raised their payouts at a CAGR of 20% and 19%, respectively.

Yet as much of a stock picker as Buffett is, it is his lack of buying that is curious. The Oracle’s largest holding isn’t Apple (NASDAQ:AAPL) stock, but rather cash. In fact, Buffett has sold off significant sums of the tech giant’s stock this year to build up his cash hoard, mostly held in U.S. Treasury bills.

Waiting for the storm

Many had thought Buffett was planning a big purchase, and while half a billion dollars worth of DPZ stock is not pocket change, it is a pittance compared to his cash holdings. Even his big buy of insurer Chubb (NYSE:CB) earlier this year worth $6.7 billion was only good enough to make it Berkshire’s ninth largest position, but one that represented just 2.6% of the portfolio.

It suggests that Buffett holding so much cash and not making a large acquisition means he is looking to create a big buffer in the event of a downturn.

The Oracle told shareholders in any given year his large cash position is a sign of “extreme financial conservatism…akin to an insurance policy on a fortress-like building thought to be fireproof.” But this massive build-up indicates Buffett thinks he may just have to file a claim. 

He might not be wrong.

Running on empty

The stock market is at an all-time high, but the S&P 500 is trading at extreme valuations. Where the historical P/E of the benchmark index typically trades around 19 or 20, today it is over 30. And most of the gains are coming from just a handful of stocks.

The Magnificent 7 stocks of Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Apple, Meta Platforms (NASDAQ:META), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and Tesla (NASDAQ:TSLA) account for one-third of the index’s valuation, but are responsible for half of all the index’s gains this year.

This concentration of returns in relatively few stocks indicates that anything that upsets their upward trajectory will cause the S&P 500 to crash hard.

The worst is yet to come

Many investors try to mimic the returns of the market by buying the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). So far this year they are up 25%. Buffett even owns shares of the exchange-traded fund, though he owns just $23.5 million worth of its shares.

Yet with most of his money in cash or U.S. Treasuries, it seems clear the Oracle of Omaha sees trouble on the horizon for the market. He is keeping his powder dry for when the crash does come, at which time you can expect to see him make his move and make sweeping purchases of discounted stocks.