AI stocks are soaring and driving market gains, but Warren Buffett's warning about euphoria suggests caution: the S&P 500's valuation metrics are near historic highs, a pattern that has preceded extended downturns.

What happened: The S&P 500 is up 7% year to date and the Nasdaq-100 is up 15%, with AI stocks a major force behind the gains. The S&P 500's cyclically adjusted P/E ratio (CAPE) is now near its second-highest level ever, with the record high having been followed by three consecutive years of losses.

Why it matters: Warren Buffett's investment philosophy holds that "when investing, pessimism is your friend, euphoria the enemy." He built his reputation by buying deeply discounted stocks when others were fearful, and by avoiding overvalued stocks during bull markets. Current market conditions suggest euphoria rather than the pessimism that typically precedes good buying opportunities.

What to watch: Buffett's track record shows that a few well-timed trades—not loading up during bull markets—drove his success. Even in euphoric markets, bargains exist for disciplined investors who focus on fundamentals and valuation rather than following market sentiment.