For nearly 60 years, Warren Buffett, the Oracle of Omaha, has been Wall Street’s guiding light, turning Berkshire Hathaway into an investment juggernaut.
Under Buffett’s leadership, the returns on Berkshire’s Class A shares have soared over 5,260,000%, an astonishing figure that has garnered the admiration of investors from around the globe. Every year, 40,000 investors make the pilgrimage to Omaha, Nebraska, to hear Buffett share his insights on stocks, the U.S. economy, and his legendary investing philosophy.
However, recent developments have thrown a spotlight on Buffett’s latest move, which could be seen as a critical warning to Wall Street. In less than two weeks, Buffett’s Berkshire Hathaway has unloaded nearly $2.3 billion worth of Bank of America stock. This massive sell-off, executed with startling speed, raises important questions about the state of the market and what Buffett’s actions might signify for investors.
A Massive Sell-Off in Record Time
From July 17 to July 19, Berkshire Hathaway offloaded 33,890,927 shares of Bank of America. The selling didn’t stop there. A subsequent Form 4 filing revealed that from July 22 to July 24, another 18,899,518 shares were sold. In total, that’s 52,790,445 shares of Bank of America, translating to an eye-watering $2.3 billion in sales.
This aggressive reduction of Berkshire’s stake in Bank of America, its second-largest holding, suggests several potential strategies or concerns. One possible reason for this substantial sell-off is that Bank of America may no longer represent the bargain it once did. After trading below its book value for years, the stock has now climbed to a 25% to 30% premium, possibly prompting Buffett to lock in profits.
Another plausible explanation could be the anticipated changes in Federal Reserve policy. Bank of America, like other major money-center banks, is highly sensitive to interest rate fluctuations. While the bank benefited significantly from the recent aggressive rate hikes, a shift towards easing rates could hurt its net interest income. Buffett’s team might be anticipating such changes and adjusting their holdings accordingly.
Additionally, the historically low corporate tax rates might have encouraged Buffett to take some gains. During Berkshire Hathaway’s annual shareholder meeting, Buffett noted that he had sold over 116 million shares of Apple in the first quarter, a decision partly driven by favorable tax conditions.
Buffett’s $56 Billion Warning
Buffett’s latest move aligns with a broader pattern of net-selling equities over the past year and a half. Since October 2022, Buffett has been a net-seller of stocks, with the total amount of net-equity sales reaching $56.09 billion. This includes:
- Q4 2022: $14.64 billion
- Q1 2023: $10.41 billion
- Q2 2023: $7.98 billion
- Q3 2023: $5.25 billion
- Q4 2023: $0.53 billion
- Q1 2024: $17.28 billion
This consistent selling trend, combined with Buffett’s efforts to increase Berkshire’s cash reserves, serves as a clear indication that he views the current stock market as overpriced. Despite his long-standing optimism about the U.S. economy and his tendency to focus on long-term growth, Buffett’s recent actions suggest a more cautious stance in the short term.
The Shiller P/E Ratio: A Key Indicator
Buffett’s caution is further underscored by valuation metrics such as the Shiller price-to-earnings (P/E) ratio, also known as the cyclically adjusted price-to-earnings ratio (CAPE). As of July 25, the Shiller P/E ratio was approaching 35, more than double its historical average of 17.14. This metric, which smooths out earnings over a decade to account for inflation, has a strong track record of predicting significant market pullbacks when it surpasses 30.
Historically, whenever the Shiller P/E has exceeded 30, the stock market has experienced substantial corrections, ranging from 20% to 89% in major indexes like the S&P 500 and the Dow Jones Industrial Average. While the Shiller P/E does not pinpoint exact timing for market peaks, its historical performance suggests that extended valuations often lead to major downturns.
Buffett’s massive sell-off of Bank of America stock, combined with his broader pattern of net equity sales, adds to the growing evidence that he and his investment team view the market as historically overpriced. For long-term investors, the message is clear: While the U.S. economy remains robust, a significant market correction could be on the horizon.
As Warren Buffett continues to navigate these turbulent waters, his actions serve as a crucial reminder to investors to remain vigilant and consider the possibility of an impending market correction.
