Is 2026 the Year Stock Prices Fall? What Warren Buffett's Moves Reveal About Market Excess

The Warning Signs Are Flashing Red

Berkshire Hathaway has been steadily reducing its equity positions for three consecutive years. Under Warren Buffett’s leadership, the company sold more stocks than it purchased—a significant shift that shouldn’t be ignored. Why? Because the stock market has become expensive by historical standards.

The S&P 500 now trades at 22.2 times forward earnings, according to FactSet Research. Compare that to just two years ago when it sat at 15.5 times forward earnings. This premium valuation is particularly noteworthy because the index has only experienced such elevated multiples twice in the past four decades: during the dot-com bubble and the COVID-19 pandemic. Both periods ended badly.

Torsten Slok, chief economist at Apollo Global Management, highlights that valuations at these levels have historically coincided with annual returns below 3% over the next three years. The S&P 500 has delivered double-digit returns for three straight years—a pattern that historically precedes weaker performance in the fourth year.

When Greedy Sentiment Collides With Economic Headwinds

What makes 2026 particularly risky? President Trump’s aggressive tariff policies. These trade measures have already begun to coincide with a weakening jobs market. Federal Reserve research confirms that tariffs historically act as a drag on economic growth, which contradicts the current optimism flooding the market.

The American Association of Individual Investors (AAII) tracks investor sentiment, and the numbers are telling. Bullish sentiment recently hit 42.5%—significantly above the five-year average of 35.5%. This matters because the AAII survey operates as a contrarian indicator: when sentiment gets this greedy, forward returns tend to disappoint.

Warren Buffett long ago shared a simple but powerful philosophy: “Be fearful when others are greedy, and be greedy when others are fearful.” That’s exactly the environment we’re in now. Optimism is widespread, yet valuations are stretched and economic clouds are gathering.

Even the Oracle Admits He Can’t Time the Market—But His Actions Speak Volumes

Buffett has been clear that predicting short-term stock movements is impossible. He once compared such forecasts to “poison.” Even he doesn’t know whether stocks will be higher or lower a month or year from now.

Yet his retreat from aggressive buying tells a different story. When legendary investors reduce positions during periods of peak optimism, it’s worth paying attention. His actions before stepping down as Berkshire Hathaway’s CEO reinforced a message: reasonable prices are hard to find in today’s market.

What This Means for Your Portfolio

A market decline in 2026 isn’t guaranteed, but the conditions are ripe. Elevated bullish sentiment combined with historically high valuations and trade policy uncertainty point toward caution rather than confidence. The contrarian approach isn’t to predict a crash—it’s to avoid following the greedy crowd when risk appears highest.

The wisdom lies not in panic, but in patience. When others are greedy and valuations reach extremes, disciplined investors wait for better opportunities. That’s Warren Buffett’s real message for 2026.