Is It Safe to Buy Stocks With the S&P 500 Near Its Record High? Here’s Warren Buffett’s Investing Advice – The Motley Fool – CROCODOM.com

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The S&P 500 (^GSPC -0.11%) soared 24% in 2023, and investors have bid the benchmark index to multiple record highs this year. Factors contributing to that upward momentum include fading inflation, the resilient economy, a rebound in corporate earnings, and expectations that the Federal Reserve will cut interest rates in the near future. Fascination with artificial intelligence has also sent many stocks higher in recent months.
However, the S&P 500 now trades at 20.4 times forward earnings estimates, a meaningful premium to the 10-year average of 17.7. As a result, certain Wall Street analysts see a drawdown on the horizon. For instance, JPMorgan Chase has set a target of 4,200 for the S&P 500, implying about 15% downside from its current level.
Investors wondering whether it’s safe to buy stocks in the wake of the market’s steep rally should consider this advice from Warren Buffett.
Warren Buffett is one of the most successful investors in American history. He began buying shares of Berkshire Hathaway in 1962 and accumulated a controlling ownership stake by 1965. Under his leadership, Berkshire has evolved from a struggling textile mill into one of the most valuable businesses in the world with shares compounding twice as fast as the S&P 500 over a period of more than 55 years.
Buffett’s patient, value-oriented investment philosophy played an important role in catalyzing that evolution. Berkshire is currently worth $880 billion, and a substantial portion of that value comes from its $370 billion stock portfolio. Buffett manages the vast majority of that total, which makes him (and Berkshire) an excellent case study for investors.
Buffett once wrote, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” That widely quoted advice calls attention to a quirk of human nature. People overreact to good news and bad news, so stocks are often overvalued during bull markets and undervalued during bear markets.
However, Buffett and his co-investment managers, Todd Combs and Ted Weschler, have found buying opportunities in all market environments, including the current one. They bought shares of Sirius XM Holdings, Occidental Petroleum, and Chevron for Berkshire’s portfolio during the fourth quarter of 2023, despite the increasingly rich valuation of the S&P 500.
Buffett buys businesses with durable economic moats but only when shares trade at a discount to their intrinsic value. Buffett also picks stocks he feels comfortable holding for long periods of time. Every investor should follow that blueprint:
Here’s the bottom line: The S&P 500 has moved much higher over the past year, and the index does trade at a premium to its historical valuation, meaning many stocks are probably overvalued at their current prices. In other words, the current market environment is more greedy than fearful, so investors should be cautious — but not so cautious that they miss out on opportunities.
Berkshire bought stocks in the fourth quarter, meaning Buffett and his team were able to find what they believe are good businesses trading at reasonable valuations. Investors who follow that blueprint have a good shot at making money in the long run.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Nvidia and Visa. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Chevron, JPMorgan Chase, Nvidia, and Visa. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
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