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As one of the most successful investors alive today, Warren Buffett’s gone through numerous market crashes and corrections throughout his investing career. As such, heeding his advice during periods of market volatility is likely a prudent move, especially for investors allocating capital to US stocks today.
2025’s been a remarkable year for the S&P 500. Despite macroeconomic uncertainty, US stocks have continued to climb and reach record highs. That’s been fantastic for investors, but there’s a risk that it might not last for much longer.
Right now, America’s flagship index is trading at a pretty stretched price-to-earnings ratio of 26 versus its historical average of 16. And combining lofty valuations with upcoming economic headwinds could open the floodgates to market volatility.
The pending storm
US inflation has started to rise, but it’s only been a small incremental step change – hardly the disaster that many economists were projecting earlier this year. Yet, this might change.
A lot of companies flooded their inventories with new products and raw materials ahead of the 10% tariffs that emerged in April. This frontloading has allowed businesses to keep prices relatively stable and avoid pushing customers into the arms of competitors.
However, inventory stockpiles will eventually run out. And while trade deals are starting to emerge, baseline tariffs are still in place, increasing import costs for US companies to replenish inventory.
Unless these firms are willing to absorb these incoming expenses, price inflation could start to creep in over the next few months. This is what’s causing a lot of investing experts like Jamie Dimon to become increasing cautious as we enter the second half of 2025. And even Buffett and his team are seemingly being similarly careful, given his investment firm, Berkshire Hathaway, has been a net seller of stocks in 2025.
Avoid panicking by preparing
Of course, there’s no guarantee that a crash or correction will occur this year. After all, businesses may prove to be more resilient than expected, and earnings may start to catch up to valuations. But if the market does decide to throw a tantrum, this could present a fantastic buying opportunity for US stocks. As Buffett puts it: “Be fearful when others are greedy and greedy when others are fearful”.
To capitalise on this advice, I’ve been trimming some of my largest US holdings that have reached lofty multiples. And one example would be Arista Networks (NYSE:ANET).
The networking infrastructure business is actually performing admirably at the moment. Even with substantial customer concentration risk, revenue, free cash flow, and profits have been surging on the back of rapidly rising artificial intelligence (AI) infrastructure spending. And that’s translated into a phenomenal 600% share price gain over the last five years.
But, with its forward price-to-earnings ratio and price-to-sales ratio reaching 44 and 20 respectively, investor growth expectations are getting unreasonably high, in my opinion. Don’t forget, data centre spending’s notoriously cyclical. And with competitors like Nvidia now starting to encroach on its market, Arista could struggle to maintain this valuation, especially if customer spending begins to slow as economic conditions turn.
At a better price, there remains an exciting opportunity here. And the same’s true for plenty of other top-notch US growth stocks that have become a bit pricey. Building a cash position not only helps hedge against potential volatility. But also, if the worst does come to pass, investors will be able to follow in Buffett’s footsteps, be greedy, and potentially unlock exceptional long-term gains.
