Although "value" is a subjective term that's going to be different from one investor to the next, the S&P 500's Shiller price-to-earnings (P/E) Ratio, which is also known as the cyclically adjusted P/E Ratio (CAPE Ratio), leaves no doubt that the stock market entered 2025 at a historically expensive valuation.
In December, the Shiller P/E nearly hit a multiple of 39, which marks the highest level during the current bull market cycle, as well as the third-priciest multiple during a continuous bull market when back-tested to January 1871. The average Shiller P/E multiple since 1871 is a considerably more modest 17.24.
While the Shiller P/E isn't useful for predicting when downturns will occur in the S&P 500 or Wall Street's other major stock indexes, it does have a knack for eventually foreshadowing significant downside in the broader market. The previous five instances where the Shiller P/E topped 30, dating back to 1871, were all eventually followed by declines ranging from 20% to 89% in one or more of Wall Street's major stock indexes.
Even though Warren Buffett hasn't made any specific mention of the Shiller P/E, or any valuation index for that matter, his actions -- i.e., 10 consecutive quarters of net-selling activity and Berkshire's record cash pile -- make crystal clear that stock valuations aren't attractive.
Though the future remains bright for the U.S. economy and stock market, Buffett's short-term actions paint a potentially worrisome picture for investors in the coming quarters.
From:
Warren Buffett'''s Cash Pile at Berkshire Hathaway Just Hit a Record $348 Billion -- and That'''s Terrible News for Wall Street | The Motley Fool