When Market Valuations Hit Extremes: What the Most Expensive Stock Index Reveals About 2026

The Hidden Signal Behind Record Cash Positions

For decades, Warren Buffett built his legendary reputation by deploying capital aggressively during market opportunities. Yet a surprising shift has unfolded over the past three years: Berkshire Hathaway has consistently sold more equities than it has purchased across 12 consecutive quarters, accumulating $184 billion in net stock dispositions. Even more striking, the investment powerhouse maintains a fortress-like cash position of $382 billion—a record in its history.

This contradiction tells an important story. When an investor with Buffett’s track record hoards capital while markets rally, it signals something fundamental about valuations. The company’s investment managers, including Ted Weschler and Todd Combs, have found few compelling reasons to deploy Berkshire’s dry powder, suggesting that available purchasing opportunities have become scarce in the most expensive stock environments on record.

Understanding the Valuation Benchmark: Why CAPE Matters for 2026

The S&P 500 recently recorded a cyclically adjusted price-to-earnings (CAPE) ratio of 39.4—a level that places this index among the most expensive stock valuations in modern history. To contextualize this figure: since the S&P 500’s creation in 1957, the index has only traded above a CAPE ratio of 39 for approximately 25 months out of its 68-year existence. That represents just 3% of the period.

This extreme valuation has only been matched during two other periods: the dot-com bubble peak in October 2000 and select moments in the current bull run. When the most expensive stock market conditions emerge, historical patterns suggest investor caution becomes warranted.

What History Reveals: Stock Market Performance After Valuation Peaks

The correlation between elevated CAPE ratios and subsequent market performance is striking. Following instances when the S&P 500’s monthly CAPE ratio exceeded 39, historical data compiled from Robert Shiller’s research reveals:

• 12-Month Forward Returns: The index has declined by an average of 4%, suggesting potential weakness through 2026
• Best Case Scenario: +16% returns (rare outcomes during valuation extremes)
• Worst Case Scenario: -28% drawdowns (severe corrections following overvaluation)

Perhaps more concerning is the three-year performance window. The S&P 500 has never posted positive returns during the three years following a CAPE peak above 39. Instead, the index has contracted by an average of 30% across such periods, implying potential weakness extending through 2028.

These patterns don’t guarantee future outcomes, but they provide historical context for understanding what the most expensive stock valuations typically precede.

Why Buffett’s Positioning Aligns with Market Signals

Berkshire Hathaway’s shift from net buyer to net seller becomes less mysterious when viewed through the valuation lens. Back in 2018, Buffett remarked that his company struggled to find months when it wasn’t purchasing equities. The contrast with today’s selling stance reflects the changing landscape rather than a shift in investment philosophy.

With record cash reserves and sustained selling activity, Buffett’s team appears positioned for a different environment—one where valuations eventually adjust and fresh buying opportunities emerge. The $184 billion reduction in equity exposure over four years suggests conviction about waiting for better entry points rather than deploying capital into stretched markets.

Practical Considerations for Investors

While historical precedent suggests caution, the future remains uncertain. Artificial intelligence breakthroughs could accelerate corporate earnings growth and potentially justify current valuations by reducing concerns about the most expensive stock multiples. Alternatively, profit margins might expand significantly, reshaping the earnings picture.

However, now represents a prudent moment to audit existing portfolios. Investors should consider whether each current holding would merit repurchase at today’s valuations—or whether holdings might be better exchanged for companies better positioned for potential market corrections.

The Bottom Line

When the most expensive stock valuations in decades coincide with legendary investors holding record cash, the message warrants attention. Whether 2026 brings the average 4% decline or something more severe, being intentional about portfolio composition makes sense during valuation extremes.