Last week, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) submitted its Form 13F for the fourth quarter. That document detailed several changes to its portfolio, including the fact that Berkshire sold its stake in the Vanguard S&P 500 ETF (NYSEMKT: VOO).
That decision may have surprised investors. Buffett often says an S&P 500 index fund is the best way for most people to get exposure to U.S. stocks. And many Wall Street analysts expect the S&P 500 (SNPINDEX: ^GSPC) to soar from its current level of 6,010 in the coming months and years:
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- The S&P 500 has a bottom-up target price — calculated by aggregating the median fair value estimate on each stock — of 6,920, implying 15% upside from its current level in the next year.
- Tom Lee at Fundstrat Global Advisors thinks the S&P 500 could reach 15,000 by 2030. That implies a total return of 150% from its current level.
- Ed Yardeni at Yardeni Research in October estimated the S&P 500 would return 11% annually over the next decade, which equates to a total return of 184% through late 2034.
Read on to see why analysts are generally optimistic about U.S. stocks, and why Buffett’s decision to sell the Vanguard S&P 500 ETF is no cause for alarm.
Why many Wall Street analysts are optimistic about the U.S. stock market
The S&P 500 is generally considered the single best gauge for the overall U.S. stock market. And the Vanguard S&P 500 ETF tracks that index. It includes 500 large U.S. companies that span value stocks and growth stocks, covering about 80% of domestic equities and 50% of global equities by market value.
Put simply, the Vanguard S&P 500 ETF provides exposure to hundreds of influential stocks. The five largest holdings include: Apple (6.1%), Microsoft (6.1%), Nvidia (5.7%), Amazon(4.3%), and Alphabet (4.2%). The index fund returned 241% in the last decade, compounding at 13% annually. And despite elevated valuations, certain analysts anticipate similar returns in the S&P 500 in the coming months and years.
- The S&P 500 currently has a bottom-up target of 6,920, which implies 15% upside from its current level in the next year. That reflects widespread confidence among Wall Street analysts that S&P 500 companies will report an acceleration in earnings growth in 2025 and 2026. Specifically, S&P 500 earnings increased 10.2% last year, but earnings growth is forecast to accelerate to 12.7% this year and 13.9% next year.
- Tom Lee says the S&P 500 could reach 15,000 by 2030, which implies 150% upside from its current level. He attributes that outlook to two tailwinds: First, millennials (the largest living generation) are reshaping and strengthening the U.S. economy. Second, the global labor shortage should lead to strong adoption of artificial intelligence, such that technology companies (the largest market sector) benefit greatly.
- Ed Yardeni expects the S&P 500 to compound at 11% annually over the next decade, which implies a total return of 184%. He acknowledges valuations are stretched by historical standards, but argues record high profit margins among S&P 500 companies will continue to expand as artificial intelligence adoption boosts productivity, driving robust earnings growth for the foreseeable future.
Despite those optimistic forecasts, Warren Buffett sold Berkshire Hathaway’s entire stake in the Vanguard S&P 500 ETF during the fourth quarter. In fact, he actually sold the only two index funds in Berkshire’s portfolio, and both were S&P 500 index funds initially purchased in the fourth quarter of 2019.
So, investors have to ask themselves: Does Buffett know something Wall Street doesn’t? In this case, I believe the answer is no.
Image source: Getty Images.
Why Warren Buffett’s decision to sell S&P 500 index funds is no cause for alarm
Warren Buffett has regularly endorsed a low-cost S&P 500 index fund as the best option for non-professional investors that want exposure to U.S. stocks. Consequently, his decision to sell Berkshire’s S&P 500 index funds begs the question: Has Buffett lost confidence in the U.S. stock market or the American economy?
I don’t think so. Buffett once told shareholders his goal was to grow the per-share intrinsic value of Berkshire more quickly than the increase in the S&P 500. That goal simply cannot be achieved by owning S&P 500 index funds. By definition, those funds will grow at exactly the same pace as the S&P 500.
Moreover, Buffett never allocated much money to S&P 500 index funds in the first place. Berkshire in the third quarter had $45 million split between two S&P 500 ETFs, but that sum represented less than 0.02% of its $266 billion equities portfolio. Put differently, the index funds were pocket change, and Buffett’s goal in selling them may have been to consolidate that pocket change into a single cash position.
Here is the bottom line: While Buffett selling S&P 500 index funds does not evince confidence in U.S. stocks, investors should not read too much into the decision. Buffett began recommending S&P 500 index funds long before Berkshire took a position in one, so selling those funds does not mean his views have changed.
To be clear, that does not mean the S&P 500 will only go higher in the future. Valuations are elevated, and that could lead to a correction or bear market in the coming months. But history says investors that patiently hold an S&P 500 index fund will be rewarded over time.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.