Billionaires Warren Buffett, David Tepper and Terry Smith are sending a very clear warning to Wall Street — Are you paying attention?

For the better part of two years, bulls they firmly controlled Wall Street. A resilient U.S. economy, along with excitement surrounding the rise of artificial intelligence (AI), has helped lift the ageless. Dow Jones Industrial Average (DJINDICES: ^DJI)standard S&P 500 (SNPINDEX: ^GSPC)and focused on growth Nasdaq Composite (NASDAQINDEX: ^IXIC) to multiple record highs in 2024.

However, optimism is not universal when it comes to investing. Some of the most prominent and widely followed billionaire money managers including Berkshire Hathawayhis (NYSE: BRK.A)(NYSE: BRK.B) Warren Buffett, Appaloosa’s David Tepper and Fundsmith’s Terry Smith sent an ominous warning to Wall Street with their trading activity.

Some of Wall Street’s top investors are retreating to the sidelines

While no money manager is a carbon copy of another, Buffett, Tepper and Smith are cut from similar cloths. While they may have different areas of expertise or mix in investment areas, the other two may not — for example, David Tepper tends to be a bit contrarian and isn’t afraid to invest in distressed assets, including debt — all three tend to be patient investors who focus on locating undervalued/undervalued companies that can be held for long periods in their respective funds. It’s a really simple formula that has worked well for all three billionaire investors.

When 13F forms are filed with the Securities and Exchange Commission each quarter, professional and retail investors flock to these reports to see which stocks, industries, sectors and trends have piqued the interest of Wall Street’s brightest investment minds. However, the latest round of 13Fs came as a surprise to investors who closely follow the trading activity of Buffett, Tepper and Smith.

The quarter ended in June marked the seventh consecutive quarter in which Warren Buffett was a net seller of stocks. Divestiture of more than 389 million shares of the main holding company Apple during the second quarter and north of 500 million shares in total as of October 1, 2023, leading to a cumulative $131.6 billion in net sales of shares since the beginning of October 2022.

Despite arguing that investors are not betting against America and stressing the value of long-term investing, Buffett’s short-term actions have not aligned with his long-term ethos.

But he is not alone.

David Tepper’s Appaloosa ended June with a portfolio of 37 securities investments worth about $6.2 billion. During the second quarter, Tepper and his team added to nine of those positions and reduced or completely sold his fund’s holdings in 28 others, including Amazon, Microsoft, Meta platformsand Nvidia. Tepper gave up 3.73 million shares of Nvidia, which equates to more than 84% of his previous position in Appaloosa.

UK stock picker extraordinaire Terry Smith ended June with a portfolio of 40 stocks worth about $24.5 billion. He added to his stakes in just three of those 40 stocks — Fortinet, Texas Instrumentsand Oddity Tech — while reducing the fund’s position in the other 37.

These patient and historically bullish investors send a message that is undeniably clear: value is hard to come by right now on Wall Street.

Stocks are historically expensive – and that’s a problem

While “value” is a completely subjective term, one valuation tool indicates that stocks are at one of the most expensive levels in history dating back to the 1870s. I’m talking about the S&P 500’s Shiller price-to-earnings (P/E) ratio , which is also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio).

Most investors are probably familiar with the traditional P/E ratio, which divides a company’s stock price by its trailing 12-month earnings per share (EPS). While the P/E ratio tends to perform fairly well for mature companies, it falls short for growth stocks that reinvest a large portion of their cash flow. It may also be adversely affected by one-off events such as the COVID-19 lockdown.

The Shiller P/E ratio is based on average inflation-adjusted EPS over the last 10 years. Considering a decade’s worth of earnings history means that short-term events do not negatively affect this valuation model.

As of the closing bell on September 16, the S&P 500 Shiller P/E was 36.27, which is just below the 2024 high of about 37 and more than double the 153-year average of 17,16, when it was tested back to 1871. .

To be fair, the Shiller P/E has spent much of the past 30 years above its historical average due to two factors:

1. The Internet has democratized access to information, which has given everyday investors more confidence to take risks.

2. Interest rates have spent more than a decade at or near historic lows, encouraging investors to pile into stocks with higher multiples that can benefit from low borrowing costs.

But when examined as a whole, there are only two other periods in history when the S&P 500 Shiller P/E has sustained a higher level during a bull market. It peaked at 44.19 in December 1999, just before the dot-com bubble burst, and briefly topped 40 in the first week of January 2022.

After the peak of the dot-com bubble, the S&P 500 lost only half its value, while the Nasdaq Composite lost more than three-quarters before finding its footing. Meanwhile, in the bear market of 2022, the Dow Jones, S&P 500 and Nasdaq Composite have all lost at least 20% of their value.

In 153 years, there have only been six occasions when the S&P 500’s Shiller return has exceeded 30 during a bull market, including today. After all five previous cases, minimum the S&P 500’s downside was 20%, with the Dow Jones Industrial Average losing as much as 89% during the Great Depression.

The point is that extended stock valuations can only be sustained for so long. Even though Warren Buffett would never bet against America and Terry Smith is always on the lookout for undervalued assets, none of the billionaire money managers feel compelled to put their capital to work. In fact, Berkshire Hathaway had a record $276.9 billion in cash at the end of June, and Buffett still he’s not a stock buyer… other than his own company stock.

In short, some of Wall Street’s most successful long-term, value-seeking investors don’t want much to do with the stock market right now, and it’s a very clear warning that investors should heed Careful.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Sean Williams has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Amazon, Apple, Berkshire Hathaway, Fortinet, Meta Platforms, Microsoft, Nvidia and Texas Instruments. The Motley Fool recommends the following options: long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.

Billionaires Warren Buffett, David Tepper and Terry Smith are sending a very clear warning to Wall Street — Are you paying attention? was originally published by The Motley Fool