Warren Buffett took control of Berkshire Hathaway in 1965. In the subsequent decades, the company evolved from a small textile mill into a multinational conglomerate with subsidiaries across insurance, retail, utilities, manufacturing, and freight rail transportation.
Under Buffett, Berkshire Class A stock increased 6,100,000%, while the S&P 500 (^GSPC +0.29%) returned 46,100%. But Buffett stepped down from his position as CEO in December 2025, handing the reins to Greg Abel, who had previously served as CEO of Berkshire Hathaway Energy.
During his first quarter at the helm, Abel delivered a $397 billion warning. Here's what investors should know.
Image source: Getty Images.
Berkshire Hathaway was once again a net seller of stocks despite a record cash position
One of the most important aspects of Berkshire's business is its stock portfolio. Like many insurance companies, Berkshire uses cash flows from underwriting policies to buy stocks as a means of driving long-term capital appreciation. Its portfolio is currently worth $327 billion, which accounts for a large portion of its $1 trillion market capitalization.
For decades, investors closely watched Berkshire's portfolio to learn what stocks Warren Buffett was buying and selling. Interestingly, he was actually a net seller of stocks during his final 13 quarters as CEO, meaning the value of stock Berkshire sold exceeded the value of stock purchased in every quarter since the current bull market began in Q4 2022.
That trend continued under Greg Abel in Q1 2026. Berkshire reported $8 billion in net stock sales, bringing the streak to 14 straight quarters. But the real warning lies in the company's record cash position. Berkshire reported $397 billion in cash and equivalents in Q1 2026, meaning it was a net seller despite having plenty of investable capital.
The most logical explanation is that Abel (and investment manager Ted Weschler) struggled to find stocks at attractive valuations in the current market environment. Indeed, the S&P 500 currently trades at one of its most expensive valuations on record, and history says the index could fall sharply in the coming years.
The S&P 500 has not been this expensive since the dot-com crash in 2000
The S&P 500 currently has a cyclically adjusted price-to-earnings (CAPE) ratio of 40.1. That is a very expensive valuation. In fact, the S&P 500's monthly CAPE ratio has not topped 40 since the dot-com crash in September 2000.
While valuation metrics tend to be poor predictors of near-term returns, the CAPE ratio has generally been a good predictor of the stock market's long-term trajectory. The chart below shows the S&P 500's average return over different periods following a monthly CAPE reading above 40.
|
Holding Period |
S&P 500's Average Return |
|---|---|
|
1 year |
(3%) |
|
2 years |
(19%) |
|
3 years |
(30%) |
Data source: Robert Shiller.
The chart offers chilling context for investors. If the S&P 500's future returns align with its past performance, the index will decline 3% by May 2027, 19% by May 2028, and 30% by May 2029. Of course, past performance is not a guarantee of future results.
The CAPE ratio considers only inflation-adjusted earnings from the past, but profit margins could expand in the future as artificial intelligence drives productivity. In that scenario, earnings could grow quickly enough that the S&P 500 continues trading higher while its CAPE ratio drops to something more reasonable. But stocks are still expensive by historical standards, and the situation is complicated by uncertainty created by the Iran war.
Here's the bottom line: Under Greg Abel, Berkshire maintained its status as a net seller of stocks in the first quarter, and the S&P 500's rich valuation is the most likely culprit. That doesn't mean investors should avoid the market entirely. As one of the largest companies on the planet, Berkshire has relatively few investment options that will actually move the financial needle. Individuals are not so limited.
However, investors still need to focus on quality businesses rather than chasing momentum. Avoid stocks you would be uncomfortable holding through a prolonged market downturn, and focus instead on buying high-conviction stocks whose earnings are likely to be much higher five to 10 years from now.
