In 1965, Warren Buffett took control of Berkshire Hathaway (BRK.A 0.33%) (BRK.B 0.36%), a small New England textile operation he later said was "on a death march." Buffett quickly pivoted to insurance and used the cash flows from policy premiums to either acquire or purchase equity stakes in other businesses.
Berkshire Hathaway's Class A shares have increased more than 6,100,000% since Buffett took control, while the benchmark S&P 500 (^GSPC 1.22%) has returned about 46,000%. That outperformance, coupled with Buffett's reputation for humility and integrity, has made him one of the most revered figures on Wall Street.
In May, Buffett announced plans to retire as CEO of Berkshire Hathaway at the end 2025. Many investors will sorely miss his insights on the economy and stock market, but his recent $184 billion warning will likely echo through the next year: It hints at a stock market decline in 2026.
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Warren Buffett's $184 billion warning to investors
Warren Buffett, the primary investment manager at Berkshire Hathaway, has historically been a net buyer of stocks. He told CNBC in 2018, "It's hard to think of very many months when we haven't been a net buyer of stocks." Indeed, Berkshire has built a $300 billion portfolio that accounts for a large percentage of its $1 trillion market capitalization.
However, Buffett and his fellow investment managers Ted Weschler and Todd Combs have been net sellers since the current bull market began in Q4 2022. That means Berkshire sold more stock than it purchased in the last 12 quarters, and its net sales totaled $184 billion during that period as of September 2025.
What makes that warning particularly concerning is that Berkshire had a record $382 billion in cash and short-term investments on its balance sheet as of September 2025. So, Buffett and his understudies have been net sellers despite having plenty of investable capital. The most logical explanation? Buying opportunities have been few and far between due to the stock market's historically high valuation.
The S&P 500 trades at one of its most expensive valuations in history
The S&P 500 has recorded an average cyclically adjusted price-to-earnings (CAPE) ratio of 39.4 in December, the most expensive valuation since October 2000. In fact, the index has only achieved a CAPE ratio above 39 during 25 months since its creation in 1957. In other words, the S&P 500 has only been this expensive 3% of the time throughout its 68-year history.
I think that explains why Warren Buffett has been a net seller throughout the current bull market. But whatever the reason, history says the stock market could perform poorly in 2026. The chart below shows the S&P 500's average, best, and worst one-year return after recording a monthly CAPE multiple above 39.
|
S&P 500's Average Return |
S&P 500's Best Return |
S&P 500's Worst Return |
|---|---|---|
|
(4%) |
16% |
(28%) |
Data source: Robert Shiller. The chart shows the S&P 500's average, best, and worst 12-month returns following incidents when its CAPE ratio topped 39.
As shown above, following past incidents when the S&P 500 had a monthly CAPE ratio above 39, the index has declined by an average of 4% during the next year. In other words, the S&P 500 (the benchmark index for the U.S. stock market) will drop 4% by December 2026 if its performance matches the historical average.
There is worse news. While not shown in the chart, the S&P 500 has never increased during the three-year period after its monthly CAPE ratio topped 39. In fact, the index has declined by an average of 30% under those circumstances. In other words, the S&P 500 will fall 30% by December 2028 if its performance matches the historical average.
Does that mean you should sell all your stocks? No. Past performance is never a guarantee of future results. Earnings may grow more quickly in the future as artificial intelligence boosts profit margins, which could ease concerns about the elevated CAPE ratio. However, now is a good time to review your portfolio and sell any stocks you would not want to hold through a drawdown.
