Key Points
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The S&P 500 this year is extending a three-year gain, climbing in the triple digits over the period.
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The words of Buffett and Ackman may inspire us to make one particular move, and this move could result in a long-term win.
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The S&P 500 has advanced about 100% since the start of 2023, buoyed by investors’ enthusiasm about artificial intelligence (AI) stocks. This movement wasn’t based only on potential earnings growth but on compelling gains that were already beginning to unfold. Companies offering AI chips and cloud services saw revenue take off, and investors were optimistic that this was just the beginning.
Though various headwinds — from rising inflation to concerns about AI spending — have weighed on the picture from time to time, the overall momentum has continued this year. Against this backdrop, however, certain investing experts have stepped forward to pronounce important words of caution.
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In fact, billionaires Warren Buffett and Bill Ackman delivered a similar, shocking warning to Wall Street. Let’s consider their comments and check out the one thing you, as an investor, should do now.
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AI and growth stocks advance
First, let’s start by taking a closer look at the stock market’s performance so far this year. The S&P 500 has climbed, extending its three-year gain, and AI and other growth stocks continue to rise. That said, investors have also broadened their portfolios to include AI stocks that didn’t soar in the earliest stages of the boom, as well as other industries.
Certain headwinds have interrupted the momentum here and there, from concerns about rising energy costs to worries about the depth of spending on the AI infrastructure build-out. Investors also questioned how the results of U.S. midterm elections would impact the market immediately afterward and in the months to follow.
Still, the overall positive momentum this year has reigned, and AI stocks have generally continued their march higher, helping the S&P 500 reach new record highs.
Now, let’s turn to the warnings from investors Bill Ackman, the founder of Pershing Square Capital Management, and Warren Buffett, chairman emeritus of Berkshire Hathaway. Both of these billionaires used the word “casino” to describe the behavior of certain investors these days. This is shocking, as most investors turn to the stock market to invest and benefit over the long term — not to gamble.
Enormous price swings
Just this week, Ackman told CNBC that speculation in the market was resulting in enormous price swings. And this is driven by leverage, or borrowed money poured into a variety of bets on or against particular assets.
“We’re back to the casino-type markets when there was 95% leverage,” Ackman said in the interview. “Every number of days, I feel like markets are broken.”
This echoes something Buffett told CNBC a few months earlier, during the Berkshire Hathaway shareholders’ meeting. He compared long-term investing to speculation, likening them to a church and a casino, respectively. He said the casino had become attractive for some, and “We’ve never had people in a more gambling mood than now.”
So the message from these two billionaires is clear. A certain level of speculation is driving volatility these days, and quality stocks as well as major benchmarks have felt the impact.
Meanwhile, with the S&P 500 Shiller CAPE ratio trading at historically high levels, indicating that stocks are expensive, history shows us that declines may be ahead.
Shiller CAPE Ratio data by YCharts
The Shiller CAPE ratio is an inflation-adjusted measure of stock price in relation to earnings per share. And over time, after it reaches a peak, the index generally slips. In certain cases, this may be brief and short-lived, while in others it may result in longer and deeper declines.
What you should do now
Considering the billionaires’ warnings and the idea that a drop may be on the horizon, here’s a key move investors should make: Seize the opportunity to buy quality stocks at bargain prices.
In recent times, investors have worried about AI spending, and that’s left certain quality tech stocks trading at very reasonable valuations, such as Nvidia and Amazon, for example, trading at 21x and 24x forward earnings estimates, respectively. Even if these and other companies slip in the near future, their long-term outlooks are bright. It’s impossible to get in on a stock at its very lowest, so it’s important to make the move when valuation is reasonable — and then sit back and hold on for a few years.
So, today, Ackman and Buffett are warning Wall Street about a certain amount of gambling behavior in the market. But instead of panicking, investors can use the dips as buying opportunities and potentially win big over time.
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Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, and Nvidia. The Motley Fool has a disclosure policy.
