Predictions of a US stock market crash are growing.
The S&P 500 is up 19% in the past 12 months, with the Nasdaq surging 26%, both near all-time highs. Maybe avoid any potential AI boom and bust by sticking with the S&P 500? Well, Magnificent 7 stocks account for around a third of the value of that index.
The S&P 500 14-day relative strength index touched 76 recently, though today (15 August) it’s fallen back to just under 70. Over 70 is often seen as overheating.
I’m wary of chart-based criteria, so what do fundamentals say? Berkshire Hathway (NYSE: BRK.B) CEO Warren Buffett likes one simple measure: total market value divided by GDP.
Known by value investors as the Buffett Indicator, it’s reached an all-time record at 212%. Historically, it’s hovered between 90% and 135%, perhaps suggesting stocks could be edging towards two-times overvaluation? Eek!
Commentators have been predicting corrections, with strategist Mike Wilson at Morgan Stanley recently suggesting a 10% dip could be imminent. Others fear 15% or more
Berkshire has been a net seller of stocks for 11 quarters in a row, with $344bn in cash on its balance sheet at the end of Q2. Should we follow suit and simply sell? Well, I also see some intriguing buys.
Contrarian buys
Berkshire Hathaway has bought 5m shares of UnitedHealthcare, worth close to $1.6bn. Yes, the UnitedHealthcare that’s attracting Department of Justice interest in various elements of its business, including how it accounts for aspects of Medicare. And the UnitedHealthcare whose stock fell 53% in the past 12 months, as it faces margin pressure and downgraded its forecasts earlier in 2025.
Often, Berkshire has taken a stance in opposition to the wider market. But it’s not the only contrarian investor showing interest. Michael Burry’s Scion Asset Management has also built up a position, as has Discovery Capital.
Berkshire has also taken a stake in steel producer Nucor — maybe it can benefit from tightening US import restrictions? And it’s bought house builder Lennar. I don’t know enough to consider buying either myself yet, though I am bullish about UK builders.
So, that’s one of the ways I will approach a potential stock market crash. I’ll look for what contrarian investors are buying that the bulls don’t seem to want.
Never perfect
Saying that, Warren Buffett is the first to remind us he’s made some big mistakes himself. I’m certainly be wary of buying UnitedHealthcare while it’s under regulatory scrutiny.
But then Berkshire Hathaway itself surely has to be one to consider buying to fend off short-term wobbles and focus on the long term. Now the ‘Buffett premium’ is wearing off — the stock has lost 11% since he announced his pending retirement — it could be even better value.
We still face the uncertainty over how investors will take to new CEO Greg Abel — and maybe a weaker spell for the stock. But I wish I’d bought Berkshire every time I’ve previously considered it. Or even once.
