Warren Buffett's Warning to Wall Street Just Got Distinctively Louder. Here's What to Do Next in the S&P 500 Correction.

Thanks to the billionaire’s astoundingly strong track record, investors look to Warren Buffett as an example in any investing environment. As chairman, he’s helped lead Berkshire Hathaway to a compounded annual gain of nearly 20% in 59 years, compared to the compounded increase of about 10% for the S&P 500. So, Buffett has clearly proven himself as a top investor.

And this is why investors may listen even more closely to what this investment giant has to say in times of market troubles. Buffett’s warning to Wall Street began last year as he reduced holdings of favored stocks Apple and Bank of America, closed out positions in index funds tracking the S&P 500, and built up a record level of cash. All of this signaled caution in a bull market that continued to roar higher.

In recent weeks, as investors worried about disappointing economic data and the impact of President Donald Trump’s tariffs on the economy and corporate earnings, indexes lost their positive momentum. The Nasdaq and S&P 500 even slipped into correction territory, dropping more than 10% from their most recent peaks. Amid this turmoil, Buffett’s warning to Wall Street grew distinctively louder. Let’s consider what Buffett had to say and what to do next during the market correction.

Warren Buffett is seen at an event. — Image source: The Motley Fool.

So, first, a bit of background on Buffett and his recent moves. The Oracle of Omaha is known for selecting quality stocks trading at reasonable or even bargain prices and holding on to them for the long term. A classic example is Coca-Cola, a company he bought when it was trading for about 15 times earnings in the late 1980s — and Buffett still holds this stock today.

The billionaire isn’t swayed by trends and, therefore, doesn’t mind going against the crowd. In fact, he once wrote in a shareholder letter that he and his team “attempt to be fearful when others are greedy and to be greedy only when others are fearful.” As I mentioned above, this has led to market-beating performance over time.

In keeping with his tradition of going against the crowd, as stocks soared last year, Buffett was a net seller — with net sales totaling $134 billion. This helped Berkshire Hathaway lift its cash position to more than $334 billion. Though Buffett hasn’t explained his reasons for these moves, one big factor that could have spurred his actions is the trend in valuations, with stocks reaching historically expensive levels.

The S&P 500 Shiller CAPE ratio (cyclically adjusted price-to-earnings ratio) reached beyond the level of 37, which it’s reached only twice since the benchmark launched as a 500-company index. This metric is particularly interesting because it measures price and earnings per share over a 10-year period, so it accounts for fluctuations in the economy. Decidedly, stocks had become expensive, and it’s likely the value-oriented Buffett considered this as he made investment decisions.

S&P 500 Shiller CAPE Ratio Chart — S&P 500 Shiller CAPE Ratio data by YCharts. CAPE Ratio = cyclically adjusted price-to-earnings ratio.

Buffett’s moves last year may have represented an initial warning to Wall Street, but a recent comment from the top investor could be seen as making this warning even louder. It concerns President Trump’s tariffs on imports. The Trump administration initially announced tariffs on various imported goods from China, Canada, and Mexico, then broadened the move to include aluminum and steel from any country.

This sparked worries among investors. As a result, earlier this month, the Nasdaq fell from its latest high reached on Dec. 16, and the S&P 500 followed last week when it declined from the high it reached on Feb. 19. Both finished this past week in correction territory.

In an interview with CBS last week, Buffett called the tariffs “an act of war” and said they could lead to higher prices for the consumer. He added that when looking at the tariffs, it’s crucial to think “and then what?” regarding who will be responsible for the costs. Buffett didn’t offer further details about the situation, but his words suggest the tariffs could represent a headwind for companies and the economy.

So, does this mean Buffett is fleeing the market and you should, too? Not necessarily. Sticking with his usual investing principles, Buffett was cautious last year as valuations soared and is surely keeping an eye on the tariff situation today. But as a long-term investor, Buffett has always bought stocks through all market environments, and that has proven to be a winning strategy.

The key is to focus on the valuation of each particular stock and the company’s prospects over time. Today’s tariffs may be a challenge in the near term, but if a company can manage the situation and its long-term growth story looks solid, now, when the stock is down, may be the time to buy.

Even though Buffett didn’t pile into stocks last year, he still uncovered opportunities, opening a position in Constellation Brands and adding to shares of Domino’s Pizza in the latest quarter, for example. All of this means that, in the S&P 500 and Nasdaq correction, the next thing to do is look for opportunities — quality players trading at dirt cheap valuations — pick them up, and, like Buffett, hold on for the long term.

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Bank of America is an advertising partner of Motley Fool Money. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Domino’s Pizza. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.

Warren Buffett’s Warning to Wall Street Just Got Distinctively Louder. Here’s What to Do Next in the S&P 500 Correction. was originally published by The Motley Fool

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