Warren Buffett Sends Wall Street a Grim $348 Billion Warning. History Says the Stock Market Will Do This Next.

Warren Buffett is widely regarded as one of the greatest stock pickers in American history. His patient, value-oriented investment philosophy has turned Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) into a trillion-dollar company with a $264 billion stock portfolio.

Importantly, the S&P 500 (SNPINDEX: ^GSPC) dropped into market correction territory in March, and the benchmark index was nearly 9% below its record high when the first quarter ended. As the stock market tumbled, Buffett and his co-investment managers continued to stockpile cash and sell stocks.

• Berkshire reported a record $348 billion in cash, equivalents, and U.S. Treasury bills on its balance sheet as of March 31.
• Berkshire reported $3.2 billion in stock purchases and $4.7 billion in stock sales, bringing net sales to $1.5 billion in the first quarter.

The $348 billion cash position is a particularly grim warning for Wall Street. It means Buffett struggled to find compelling buying opportunities despite the stock market correction. But the $1.5 billion in net stock sales is also noteworthy. Berkshire has now been a net seller of stocks for 10 consecutive quarters.

History says this will happen next.

Image source: Getty Images.

The S&P 500 typically performs worse when Berkshire is a net seller of stocks

Since 2019, Berkshire Hathaway has been a net seller of stocks in 19 of 25 quarters, meaning the value of stocks sold exceeded the value of stocks purchased in those quarters. Importantly, the S&P 500 has typically performed worse following quarters in which Berkshire was a net seller, as detailed below:

• The S&P 500 returned an average of 12% during the 12 months following quarters in which Berkshire was a net seller.
• The S&P 500 returned an average of 20% during the 12 months following quarters in which Berkshire was a net buyer.

However, investors shouldn't read too deeply into Berkshire's capital allocation decisions. The company is worth $1.1 trillion, which greatly limits its options as far as stock ownership is concerned. For instance, $33 billion invested in a given stock would represent a mere 3% of Berkshire's market value, but only about half the companies in the S&P 500 are even worth $33 billion or more.

The S&P 500 has historically generated robust returns during the year following its first close in a correction

The S&P 500 has suffered nine market corrections, two of which became full bear markets, during the last 15 years. But the benchmark index has historically rebounded quickly after its first close in correction territory, as shown in the chart below.

Chart by Author. Data source: YCharts.

Since 2010, the S&P 500 has generated a positive return during the year following its first close in correction territory in 8 out of 9 incidents, or 88% of the time. Meanwhile, the index returned an average of 18% during those 12-month periods. We can use that data to make an educated guess about the current situation.

On March 13, the S&P 500 closed at 5,521, down 10% from the high it reached on Feb. 19. That was its first close in correction territory. The index will advance 18% to 6,515 in the next year if its performance aligns with the historical average. That implies 14% upside from its current level of 5,687.

Here is the bottom line: Berkshire sold more stock than it purchased in the first quarter and reported a record amount of cash on its balance sheet. Those capital allocation decisions are undoubtedly a warning for Wall Street: Warren Buffett sees very few buying opportunities in the current market environment.

However, investors must interpret that warning correctly because Berkshire is limited in terms of which stocks it can buy. So, rather than avoiding the market entirely, focus on high-conviction stocks trading at reasonable prices. The S&P 500 has eventually recovered from every past decline, so the present one will almost certainly be seen as a buying opportunity in hindsight.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.