Warren Buffett has sold shares of Bank of America in 27 of the last 39 trading sessions, which paints an ominous picture for Wall Street

Few investors have the ability to capture the attention of Wall Street professionals and everyday investors Berkshire Hathaway (BRK.A -0.54%) (BRK.B -0.72%) CEO Warren Buffett. The reason is simple: It crushed Wall Street’s benchmarks for nearly six decades.

Since taking the reins in the mid-1960s, the Oracle of Omaha has overseen a cumulative return for his company’s Class A shares ( BRK.A ) of nearly 5,500,000 percent. Buffett’s ability to spot normal value and use time as an ally has been his not-so-subtle formula for building wealth for decades.

However, what Buffett does in the shorter term doesn’t always line up with the long-term ethos that he and his late right-hand man Charlie Munger instilled at Berkshire Hathaway.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

Warren Buffett has been aggressively selling shares of Bank of America since mid-July

Let me preface this discussion by stating as clearly as possible that the Oracle of Omaha strongly believes in the American economy and would never bet against it. While he realizes that economic downturns are both normal and inevitable, he has learned over many decades that recessions are short-lived. Buying stakes in time-tested businesses with strong management teams has historically worked in favor of Berkshire Hathaway shareholders.

But if you were to take a closer look at Berkshire Hathaway’s recent Form 4 filings with the Securities and Exchange Commission (SEC), you’d be left scratching your head.

Starting July 17, Buffett began overseeing the methodical sale of his company’s more than 1.03 billion shares in the money center Goliath. Bank of America (BAC -0.34%). From July 17 to September 10, there were 39 trading sessions (including the Labor Day holiday). Form 4 shows that Buffett was a seller of BofA stock in 27 of those sessions, including 12 consecutive trading days from July 17 to August 1, as well as August 23 to September 10. Cumulatively, nearly 174 million shares were sold for a total market value approaching $7.2 billion.

Finance is Buffett’s favorite sector to put Berkshire’s money to work in, and Bank of America has been his favorite bank stock for years. So what gives?

An entirely benign possibility is that this sales activity is tax-related. During Berkshire Hathaway’s annual shareholder meeting in early May, Buffett offered his opinion that corporate tax rates could rise in the coming years. He believes investors will appreciate Berkshire’s investment team for locking in some of the company’s unrealized earnings at a lower tax rate.

When Buffett made this comment, he sold nearly 13% of his company’s stake Apple in the quarter ending in March. During the second quarter, this remaining stake was effectively halved. Selling BofA’s nearly 174 million shares could be a way to lock in sizable unrealized gains at a lower tax rate.

A banking savvy Buffett is also likely to be at the helm of an expected shift in Federal Reserve monetary policy. All signs continue to point to the Federal Open Market Committee starting a rate easing cycle when it meets next week. Not only have stocks underperformed this century after rate easing cycles began, but Bank of America is the most interest-sensitive of America’s central monetary banks. The cut in interest rates will have a negative impact on net interest income more than any other bank.

While these are both logical reasons to sell a 17% stake in BofA, the truth behind Buffett’s persistent dumping of Bank of America stock may be more ominous for Wall Street.

Image source: Getty Images.

Buffett wants nothing to do with the “casino” mentality or a historically expensive stock market

While Warren Buffett would never bet against America or short selling stocks, that doesn’t mean he has to buy or hold stocks when there are visible warning signs.

The writing has been on the wall for some time now that the Oracle of Omaha is unhappy with stock valuations. In each of the previous seven quarters (October 1, 2022 to June 30, 2024), Buffett was a net seller of stocks worth a cumulative $131.6 billion. The aggressive selloff in Bank of America stock over the past eight weeks puts Berkshire Hathaway on track for an eighth straight quarter of net equity sales.

While Buffett has not explicitly said that this selling activity is due to unattractive stock valuations, he has received harsh criticism for the “casino behavior” he has witnessed on Wall Street. In his most recent annual letter to shareholders, Buffett said the following:

Although the stock market is much bigger than it was in our early years, today’s active participants are no more emotionally stable or better educated than I was in school. For whatever reason, the markets now exhibit much more casino-like behavior than they did when I was young. The casino is now in many homes and tempts the occupants daily.

Buffett is not wrong. The Internet has democratized access to information and made buying and selling stocks easier and cheaper than ever. Additionally, historically low credit rates for much of the past decade have encouraged risk-taking by mainstream investors. It was a perfect storm of temptation.

The end result is one of the most expensive stock markets on record.

S&P 500 Shiller CAPE Ratio data by YCharts.

There are plenty of ways to measure “value” on Wall Street — but few do as comprehensive a job as S&P 500Shiller’s price-earnings ratio (P/E). The Shiller P/E is also called the cyclically adjusted price-to-earnings ratio or the CAPE ratio.

The most common measure of value that investors rely on is the traditional P/E ratio, which divides a company’s stock price by its trailing 12-month earnings per share (EPS). The downside of the P/E ratio is that it can be adversely affected by one-off events or economic shocks.

Meanwhile, the Shiller P/E is based on average inflation-adjusted earnings over the past 10 years. Analyzing a full decade of earnings history ensures that one-off events don’t skew results.

As of the closing bell on September 11, the Shiller P/E was nearing 36 and had reached 37 earlier this year. There have only been two other times since 1871 when the S&P 500’s Shiller P/E ratio has been higher — before the dot-com bubble burst and in late 2021/early 2022. Following those two previous instances, the S&P 500 benchmark lost 49% and 25% of its value, respectively.

The stock market is historically expensive right now. While Buffett’s exorbitant sales in Apple and Bank of America could be to some extent tax-related, it seems far more likely that he would prefer to have plenty of cash on hand in the event of a stock market downturn driven by emotions.