Buffett Exits S&P 500 ETF, Raises Concerns Over Valuations

Warren Buffett's recent sale of the Vanguard S&P 500 ETF raises questions about market overvaluation. Despite selling the index fund, Buffett still holds significant investments in major companies. This move could signal caution for investors.

Date: 08-03-2025

AI Rating: 6

Warren Buffett's Strategy Raises Concerns

Warren Buffett's exit from the Vanguard S&P 500 ETF (VOO) suggests a potential concern regarding the valuation of large-cap tech stocks in the index. The analysis points out that the forward 12-month P/E ratio for the S&P 500 stands at 21.2, surpassing its five-year (19.8) and ten-year (18.3) averages. This situation implies that stock prices may be increasing without corresponding earnings growth, indicating a potential overvaluation in the market.

Additionally, Buffett's significant increase in cash holdings could denote his belief that a market correction may be imminent. However, it is essential to note that S&P 500 index funds comprised less than 0.02% of Berkshire Hathaway’s total portfolio by the third quarter of 2024, indicating that this decision may not necessarily reflect a broader negative outlook on the U.S. economy.

Focus on Domino's Pizza (DPZ)

In contrast to his divestment from VOO, Buffett's increased stake in Domino's Pizza (DPZ) showcases his focus on individual companies. Berkshire Hathaway purchased 1.28 million shares of DPZ, with the investment yielding more than 20%. Domino's has a solid performance record, including a quarterly dividend payment of $1.74, contributing to a sustainable yield of 1.44%. The company also boasts a reasonable payout ratio of 41.70%, promoting its potential for long-term growth.

Despite missing the most recent earnings consensus by $0.04 per share, Domino's reported a year-over-year revenue increase of 2.9% to $1.44 billion. Analysts predict an additional 4.6% revenue growth for the coming year, maintaining a Moderate Buy consensus rating. However, rising short interests indicate that some investors may perceive potential risks in DPZ, despite Buffett's confidence in the company.

In summary, while Buffett's exit from the S&P 500 ETF raises pertinent concerns about market valuations, his continued investment in strong individual companies like Domino's Pizza reflects a strategic shift towards more selective investing.

Stocks: DPZ AAPL AMZN KHC KO