Warren Buffett has built a legendary reputation as one of the greatest investors of all time. Since he took over Berkshire Hathaway in the mid-1960s, the company's stock has skyrocketed by about 5.5 million percent, compounding at an annual rate of 20%, per Reuters. By comparison, the S&P 500 has returned about 10.4% annually over the same period.

A big part of Buffett's success comes from smart stock picks and acquisitions, though his investment managers, Ted Weschler and Todd Combs, have also played a growing role. But their latest moves are raising eyebrows. 

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In the first three quarters of 2024, Berkshire Hathaway sold $133 billion in stocks and bought just $6 billion – making it a net seller by $127 billion. That's the most aggressive selling in the company's history. Even more telling, Berkshire held a record $325 billion in cash and short-term investments at the end of Q3 2024, per Nasdaq. Despite having the funds to make big purchases, Buffett and his team decided to sit on the sidelines.

Historically, the market has delivered below-average returns when Berkshire has sold more than it bought. According to Barcharts, Berkshire has been a net seller for seven years since 2010. In the 12 months following those years, the S&P 500 returned 11%, compared to its long-term average of 13%. 

Some years bucked the trend, like 2012 and 2020, when the index jumped 30% and 27%, respectively. But in 2021, it fell 19%, and in 2014, it dropped 1%. The pattern suggests that when Buffett pulls back, it's often ahead of weaker market performance.

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Another red flag? The stock market looks historically expensive. As of December 2024, the S&P 500's cyclically adjusted price-to-earnings (CAPE) ratio stood at 37.9 – far above its 20-year average of 27, per VettaFi data. Since the index was created in 1957, the CAPE ratio has only been above 35 in 52 out of 815 months. 

That means the market has been cheaper 94% of the time over the last seven decades. Historically, when the CAPE ratio has exceeded 35, the S&P 500 has posted negative average returns – down 1% over the next year and 8% over the next three years.

With Berkshire offloading stocks and the market trading at expensive valuations, analysts warn that 2025 could bring below-average returns. Morgan Stanley's chief investment officer, Mike Wilson, recently noted that high valuations combined with slowing corporate earnings could lead to a tougher market environment. 

As Bloomberg reported, Wilson believes investors should be more selective with stock picks and consider holding more cash to take advantage of future buying opportunities.

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