Warren Buffett’s 8-quarter streak seems to portend trouble for Wall Street

Few, if any, investors command as much attention on Wall Street as the aptly named “Oracle of Omaha,” Warren Buffett. Since he took over the position of CEO of Berkshire Hathaway (BRK.A 2.24%) (BRK.B 1.99%) in the mid-1960s, he steered his company’s Class A shares (BRK.A) to a staggering cumulative return of about 5,470,000% since the closing bell on Oct. 3.

Buffett’s overwhelming success has earned him quite a bit on Wall Street. Investors eagerly await Berkshire’s quarterly Form 13F filing to discover what stocks he and his lieutenant investors (Todd Combs and Ted Weschler) bought and sold.

But there’s just one problem: Buffett has sold a disproportionate amount of buying over the past two years.

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

Warren Buffett’s long-term ethos doesn’t always match his short-term actions

Make no mistake, Buffett is a staunch optimist of both the US economy and the stock market. During Berkshire Hathaway’s shareholder meetings and in his annual letter to shareholders, he stated several times that investors should not bet against America.

However, Buffett is also an ardent value investor. Even understanding that major stock indexes rise in value over long periods, he has little interest in pursuing even “wonderful companies” when their valuations are above historical norms.

Starting in October 2022, the brightest investment minds at Berkshire Hathaway, led by Warren Buffett, began selling more securities than they were buying. Here’s how that net sales activity played out over the seven-quarter period to June 30, 2024:

• Q4 2022: $14.64 billion in net equity sales
• Q1 2023: USD 10.41 billion
• Q2 2023: USD 7.981 billion
• Q3 2023: USD 5.253 billion
• Q4 2023: USD 0.525 billion
• Q1 2024: USD 17.281 billion
• Q2 2024: USD 75.536 billion

Collectively, $131.63 billion more shares were sold than Buffett and his team bought during that 21-month period. The unmistakable increase in net selling activity seen in the first half of 2024 is a reflection of Buffett’s green light on the sale of more than 500 million shares of Berkshire’s main holding company. Apple.

But that selling activity didn’t stop in the quarter that ended in June. While we’re more than a month away from Berkshire Hathaway’s third-quarter Form 13F filing and the release of its quarterly operating results, there is a very high the likelihood that Buffett has overseen the eighth consecutive quarter of net selling activity.

The reason I say “very likely” has to do with Berkshire Hathaway’s Form 4 filing with the Securities and Exchange Commission (SEC). In cases where Berkshire owns more than a 10% stake in a public company, it is required to file Form 4 with the SEC to alert investors when shares are sold or bought.

Between July 17 and October 2, the Oracle of Omaha oversaw the sale of nearly 240 million shares of Bank of America (BAC 2.19%) which was until recently holding no. 2 of Berkshire by market value. This persistent selloff in Bank of America stock is approaching nearly $9.8 billion in total value sent to the chopping block. Buffett and his team haven’t bought $9.8 billion in stocks in a single quarter in some time.

This streak of eight quarters of net sales seems to foreshadow trouble to come for Wall Street.

Image source: Getty Images.

Warren Buffett struggles to find value in a historically expensive stock market

To reiterate, you won’t find Buffett or his investment advisers shorting stocks or buying put options. He and his team believe strongly in the US economy and stock market for the long term. But with value hard to come by right now, Buffett has no qualms about sitting on his proverbial hands.

While there are lots of ways to measure value, and value itself is subjective, the measurement of how expensive stocks as a whole are right now is S&P 500his (^GSPC 0.90%) Shiller price-earnings ratio (P/E). You’ll usually find the Shiller P/E referred to as the cyclically adjusted price-to-earnings ratio or the CAPE ratio.

While the traditional P/E ratio can be useful for quick valuation comparisons, it is flawed in that shock events can adversely affect its usefulness. For example, 12-month P/E ratios proved almost useless in the early stages of the COVID-19 pandemic, when lockdowns were imposed in certain states.

By comparison, the S&P 500’s Shiller P/E ratio is based on average inflation-adjusted earnings over the past 10 years. Examining 10 years worth of earnings history tends to smooth out shock events and leads to more accurate comparisons of long-term value.

S&P 500 Shiller CAPE Ratio data by YCharts.

When trading ended on October 3, the Shiller P/E ratio reached 36.6. That’s about 1% below the high for the current bull market rally and more than double the 17.16 average when tested 153 years ago.

There is some explanation as to why the Shiller P/E has spent much of the past 30 years above its historical average. The advent of the Internet has democratized access to information for investors, and low interest rates for much of the past 15 years have fueled risk-taking.

However, a Shiller P/E of nearly 37 marks the third-highest reading during a continuous market dating back to January 1871. The only readings twice as high have been seen — before the dot-com bubble burst and in late 2021/early 2022 — were followed by the S&P 500 which lost about half and a quarter of its value, respectively.

Broadening the lens a bit more, the S&P 500 ultimately lost at least 20% of its value in all five of the previous times the Shiller exceeded 30 during a bull market. We may not know when these declines will occur, but history is pretty conclusive that extended valuations are not sustainable.

While Buffett probably has his own preferred set of valuation metrics, the S&P 500’s Shiller P/E makes it abundantly clear how expensive the stock market is right now.

The Oracle of Omaha is in no rush to put his $277 billion company to work, and his actions over the past eight quarters speak volumes.