Equity Research Team
The U.S. stock market reached historic levels last Friday, with the S&P 500 index hitting an intraday high of 6,012.45 before closing at a record 5,995.54. This marked a 0.4% increase for the day, capping off a remarkable 4.7% rally for the week. Driven by renewed economic optimism following President Donald Trump’s re-election, investors have propelled the market into record territory, with key indices reaching valuations that spark debate over potential overvaluation. Currently, the S&P 500’s price-to-earnings (P/E) ratio stands at 27, nearly double its rolling 20-year average of 15.8, reflecting elevated asset prices across sectors.
Further highlighting these stretched valuations, the market’s cyclically adjusted price-to-earnings (CAPE) ratio has climbed to 38, nearing levels last seen during the dot-com bubble. With stocks trading at these multiples, even slight economic downturns could lead to volatility, and experts caution that the market’s current momentum may be unsustainable. Following Trump’s election, investors are betting on pro-growth policies, yet the combination of historic highs and high valuations suggests that risk levels may also be elevated for the foreseeable future.
In this climate, Warren Buffett’s Berkshire Hathaway has adopted a markedly conservative approach. As of its latest financial report, Berkshire’s cash reserves have swelled to an all-time high of $325.2 billion, underscoring Buffett’s caution. Buffett also trimmed Berkshire’s stake in Apple, a core holding that previously represented 44% of the firm’s equity portfolio. Buffett is signaling his concerns over inflated valuations, even within strong-performing tech giants. Berkshire’s unprecedented cash reserve reflects Buffett’s disciplined strategy, emphasizing liquidity over risk as the market enters uncharted territory.
Berkshire Hathaway recently reported record cash reserves, reaching $325 billion. This impressive cash position reflects Warren Buffett’s investment style—a cautious approach amid current volatile market conditions. This substantial liquidity strengthens the company’s financial position, offering the ability to take advantage of future investment opportunities. In the past, Buffett has used some of the cash to repurchase its own stock. However, Berkshire declined to buy back its stock this past quarter, the first time since changing the policy in 2018.
While cash reserves reached an all-time high, Berkshire’s operating earnings fell 6% from a year earlier due to the impact of Hurricane Helene on insurance companies. Berkshire lost $565 million this quarter and estimates a loss of around $1.5 billion in the fourth quarter. Of the company’s insurance divisions, only Geico reported a Q3 underwriting profit of $2 billion, compared to $1 billion for Q3 2023. Geico’s earnings reflect a $761 million increase in premiums and a decrease in car accident claims. Underwriting losses from insurance claims related to Hurricane Helene in September offset the profits gained from Geico’s strong performance.
In this bullish market environment, Warren Buffett’s moves are raising questions among investors. While the S&P 500 keeps hitting all-time highs, having soared 25.7% since the beginning of the year—thanks to the performance of the “Magnificent 7” and recent tailwinds from Trump’s election—Buffett seems to view these high-performing months as an opportunity to take profits on some of his positions and increase his cash balance. Most of Berkshire Hathaway’s recent cash increases stem from major sales of Apple and Bank of America, its two largest holdings. Since the end of 2023, Berkshire has sold no fewer than 605 million Apple shares, representing about 70% of its total holdings in the company. Berkshire began these sales gradually in the fourth quarter of 2023, continuing with a more significant sale of 13% in the first quarter of 2024, followed by a nearly 50% reduction in its second-quarter Apple stake. Finally, in the last quarter, the conglomerate holding company sold roughly 25% of its Apple holdings. Since the end of September, Apple stock has lost 4.3% of its value, while the popular AI stock Nvidia has continued to rise, becoming the largest market capitalization. The well-known investor says he is selling because he believes stocks are trading above their intrinsic value and that capital gains taxes are likely to rise from the 21% federal tax rate. Some suggest this reasoning is valid, considering Apple stock is trading at 30x projected NTM earnings while experiencing slower-than-expected growth. In May, Buffett advised investors to expect him to sell shares and build up reserves, saying he “sees few cheap, high-quality companies in which to invest,” indicating potential changes in allocation.
As markets continue their bullish momentum, driven by high investor confidence and recent political developments, the underlying concerns of overvaluation remain. Warren Buffett's cautious strategy and significant cash reserves signal his view that opportunities may be scarce at current prices, suggesting that even in booming times, a measured approach can be wise. For investors, the message is clear: while optimism fuels growth, it’s equally crucial to keep an eye on fundamentals and be prepared for potential market shifts ahead.