Warren Buffett’s 2 rules look prescient as the S&P 500 slides

The S&P 500 just posted its second straight weekly loss, and the investor who called it hasn’t spent a dime.

Berkshire Hathaway Chairman Warren Buffett made his fortune on two rules, Investopedia noted. These are: “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”

For months, that advice looked outdated as stocks surged on an AI spending boom.

Now the benchmark sits 2.6% below its June 2 record, and the chip stocks that led the rally are getting crushed. 

The Philadelphia Semiconductor Index has tumbled about 17% in July, dragging markets down even as earnings hold up, Business Recorder reported. Buffett sits on the biggest cash pile in Berkshire Hathaway’s history and isn’t buying.

Buffett’s favorite valuation gauge hits an unprecedented 236%

The metric Buffett has long endorsed for measuring overall market valuation, often called the Buffett Indicator, compares the total value of U.S. corporate equities to the country’s gross domestic product. 

The indicator currently stands at about 236%, the highest reading in the history of the measurement, The Motley Fool reported. 

Buffett told Fortune magazine in a 2001 interview that readings between 70% and 80% represent a strong buying opportunity for stocks.

Buffett called low readings a strong entry point and extreme highs dangerous, The Motley Fool also noted.

If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%, as it did in 1999 and a part of 2000, you are playing with fire.

The S&P 500’s Robert Shiller cyclically adjusted price-to-earnings ratio reinforces the signal, sitting at about 41, the second-highest reading in history behind the 44 it reached before the dot-com bubble burst, according to Shiller’s dataset on multpl.com.

Berkshire Hathaway’s $397 billion cash reserve tells the same story

Berkshire Hathaway ended the first quarter of 2026 with $397.4 billion in cash, cash equivalents, and short-term Treasury bills, a record for the company, according to its Q1 2026 10-Q filing on SEC EDGAR. 

That capital is generating annualized interest income approaching $12 billion as government securities continue to offer yields near 3.7%.

Buffett appeared on CNBC on July 15 and described the market in unusually blunt terms, saying that finding value is difficult when the prevailing behavior among participants resembles gambling. 

He had earlier dismissed the 9% pullback stocks experienced this spring, noting that Berkshire’s share price has fallen more than 50% on three separate occasions during his tenure.

The forward price-to-earnings ratio on the S&P 500 stands at about 21, well above the long-run historical average of approximately 16, Yahoo Finance data showed.

For Buffett, a stretched valuation gauge combined with a pullback that has not come close to prior downturns justifies patience.

A semiconductor rout and a Fed decision add to the pressure on stocks

The S&P 500 lost 0.6% for the week ending July 25, following a steeper 1.6% decline the previous week, and the selling has been concentrated in the technology sector that drove the index to its record, Yahoo Finance reported. 

The VanEck Semiconductor exchange-traded fund dropped about 9% in the week ending July 18 alone, CNBC confirmed.

Alphabet and Tesla both beat revenue expectations, yet their stock prices fell 7.1% and 14.5%, respectively, as investors reacted to surging capital expenditure plans. 

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Alphabet raised its 2026 spending projection to between $195 billion and $205 billion, up from a prior estimate of $180 billion to $190 billion, Business Standard reported. The move fueled doubts about near-term returns on artificial intelligence investments.

The Federal Reserve adds another layer of uncertainty, with its July 28-29 meeting widely seen as one of the least predictable rate decisions in recent memory. 

The central bank is expected to hold rates steady, but futures markets assign a nearly 38% probability to a hike at the July 29 decision itself, and roughly an 82% probability to a hike by the Sept. 16 meeting, according to CBS News, citing CME FedWatch. Either hike would be the first since 2023.

How Buffett and Abel are deploying Berkshire’s capital

Buffett revealed on CNBC that he personally initiated Berkshire’s Alphabet position, first disclosed in Q3 2025. Under CEO Greg Abel, Berkshire expanded that stake in June by participating in a $10 billion private placement tied to Alphabet’s AI infrastructure buildout.

Abel also net sold $8.1 billion in equity holdings during his first full quarter as chief executive, continuing a net-selling pattern that has now persisted for more than three years. 

The divergence between selective buying and overall net selling underscores how narrow the opportunity set appears, even to a firm with nearly $400 billion in dry powder.

Buffett, who remains Berkshire’s largest shareholder, told CNBC that the best buying opportunities historically arrive when conditions are so severe that participants refuse to answer the phone.

Buffett’s valuation discipline has a message for ordinary investors

Buffett’s framework isn’t a crash prediction; it’s a discipline about entry points that most investors abandon when stocks keep rising. 

Sam Stovall, chief investment strategist at CFRA Research, told Reuters that chip stocks had run too far ahead of their supply lines and would have to retreat and let the fundamentals catch up, while arguing the long-term AI story remains intact.

The Buffett Indicator, the Shiller ratio, and Berkshire’s cash balance all point the same way.

The investor who has compounded wealth better than anyone is signaling patience, and the numbers behind that signal are the ones worth watching between now and the Fed’s next decision.

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