Warren Buffett, legendary investor and CEO of Berkshire Hathaway (BRK-A), wants everyone to know that he remains a long-term bull on U.S. stocks.
“Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities,” Buffett said this in his new annual letter to Berkshire Hathaway shareholders. “That preference won’t change.”
Buffett appears to be responding to the many news headlines emphasizing Berkshire’s growing cash position. Here are a few from the past few weeks:
Berkshire’s cash pile grew to $334 billion in 2024, up from $167.6 billion the year prior.
Buffett acknowledges that the value of marketable equities — companies that continue to trade publicly in the stock market — held by Berkshire declined last year.
But he also takes a more holistic view of Berkshire’s portfolio, which includes 189 companies that Berkshire owns. These are companies that don’t trade on the stock market like GEICO, Precision Castparts, BNSF, Pilot Travel Centers, Clayton Homes, and Fruit of the Loom.
“While our ownership in marketable equities moved downward last year from $354 billion to $272 billion, the value of our non-quoted controlled equities increased somewhat and remains far greater than the value of the marketable portfolio,” he wrote.
Commentators can read into Berkshire’s quarterly and annual tweaks however they like.
But Buffett’s long-term optimism for American business hasn’t changed, which is why he’d rather be invested in stocks over bonds or cash.
“Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities – mostly American equities although many of these will have international operations of significance,” Buffett wrote. “Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned.”
“Paper money can see its value evaporate if fiscal folly prevails,” he added. “In some countries, this reckless practice has become habitual, and, in our country’s short history, the U.S. has come close to the edge. Fixed-coupon bonds provide no protection against runaway currency.“
Businesses are not totally immune to emerging challenges. But history has shown repeatedly that they are quick to adapt and evolve in their relentless pursuit of growth. (We discussed this in last week’s TKer.)
“Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability as long as their goods or services are desired by the country’s citizenry,” Buffett said. “I have depended on the success of American businesses and I will continue to do so.”
None of this is to suggest stocks will only go up from here.
Buffett would be the first to tell you he has “not been good at timing” the market.
In fact, one of his most bullish essays, a New York Times op-ed titled “Buy American. I Am,” came just before the S&P 500 fell another 26% before the market bottomed in March 2009.
But the thesis of his piece ultimately held, and those who bought U.S. equities at the time did extraordinarily well in the years to follow.
The American brand of capitalism Buffett promotes isn’t just about how companies are able to come up with great goods and services. Rather, it’s about how they are unmatched at overcoming what often appear to be insurmountable challenges.
While investors should always brace for short-term volatility, they should also stay focused on the long game, which remains undefeated.
FILE- In this Wednesday, May 23, 2012, file photo, a new home still under construction is seen for sale in Springfield, Ill. Americans signed more contracts to buy previously occupied homes in May, matching the fastest pace in two years. The increase suggests home sales will rise this summer and the modest housing recovery will continue. (AP Photo/Seth Perlman, File) ·ASSOCIATED PRESS
There were several notable data points and macroeconomic developments since our last review:
Home sales fall. Sales of previously owned homes fell by 4.9% in January to an annualized rate of 4.08 million units. From NAR chief economist Lawrence Yun: “Mortgage rates have refused to budge for several months despite multiple rounds of short-term interest rate cuts by the Federal Reserve. When combined with elevated home prices, housing affordability remains a major challenge.”
Home prices fall. Prices for previously owned homes declined from last month’s levels but were above year ago levels. From the NAR: “The median existing-home sales price for all housing types in January was $396,900, up 4.8% from one year ago ($378,600).”
Homebuilder sentiment tumbles. From the NAHB’s Carl Harris: “While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent HMI. Uncertainty on the tariff front helped push builders’ expectations for future sales volume down to the lowest level since December 2023. Incentive use may also be weakening as a sales strategy as elevated interest rates reduce the pool of eligible home buyers.”
New home construction starts fall. Housing starts fell 9.8% in January to an annualized rate of 1.37 million units, according to the Census Bureau. Building permits ticked up 0.1% to an annualized rate of 1.48 million units.
Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.85% from 6.87% last week. From Freddie Mac: “Mortgage rates decreased slightly this week. The 30-year fixed-rate mortgage has stayed just under 7% for five consecutive weeks and in that time has fluctuated less than 20 basis points. This stability continues to bode well for potential buyers and sellers as the spring homebuying season approaches.”
There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million (or 40%) of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
Unemployment claims rise. Initial claims for unemployment benefits increased to 219,000 during the week ending February 15, up from 213,000 the week prior. This metric continues to be at levels historically associated with economic growth.
Card spending data is holding up. From JPMorgan: “As of 14 Feb 2025, our Chase Consumer Card spending data (unadjusted) was 3.3% above the same day last year. Based on the Chase Consumer Card data through 14 Feb 2025, our estimate of the US Census February control measure of retail sales m/m is 0.33%.”
From BofA: “Total card spending per HH was up 0.5% y/y in the week ending Feb 15, according to BAC aggregated credit & debit card data. Y/y total spending in the Midwest seems to have been impacted by snowstorms in the week ending Feb 15. Also, there was a negative impact from the Superbowl timing change (2/9/25 vs. 2/11/24), weighing on y/y total spending.“
Gas prices idle. From AAA: “Most drivers saw few changes at the pump this past week, as the national average for a gallon of gas remained steady at $3.16… According to new data from the Energy Information Administration (EIA), gasoline demand decreased from 8.57 million b/d last week to 8.23. Total domestic gasoline supply dropped from 248.1 million barrels to 247.9. Gasoline production also decreased last week, averaging 9.2 million barrels per day.”
Consumer vibes tumble. From the University of Michigan’s January Surveys of Consumers: “Consumer sentiment extended its early month decline, sliding nearly 10% from January. The decrease was unanimous across groups by age, income, and wealth. All five index components deteriorated this month, led by a 19% plunge in buying conditions for durables, in large part due to fears that tariff-induced price increases are imminent. Expectations for personal finances and the short-run economic outlook both declined almost 10% in February, while the long-run economic outlook fell back about 6% to its lowest reading since November 2023. While sentiment fell for both Democrats and Independents, it was unchanged for Republicans, reflecting continued disagreements on the consequences of new economic policies.”
CEOs are more optimistic. The Conference Board’s CEO Confidence index signaled improving optimism in Q1 2025. From The Conference Board’s Stephanie Guichard: “The improvement in CEO Confidence in the first quarter of 2025 was significant and broad-based. All components of the Measure improved, as CEOs were substantially more optimistic about current economic conditions as well as about future economic conditions — both overall and in their own industries. CEOs’ assessments of current conditions in their own industries also improved. (This measure is not included in calculating the topline Confidence measure). Consistent with an improved expected outlook, there was a notable increase in the share of CEOs expecting to increase investment plans and a decline in the share expecting to downsize investment plans. Still, a majority of CEOs indicated no revisions to their capital spending plans over the next 12 months.“
This is the stuff pros are worried about. According to BofA’s February Global Fund Manager Survey: “39% of February FMS investors say a recessionary trade war is the biggest ‘tail risk’, overtaking inflation causing Fed to hike (31%), and followed by AI bubble (13%).”
Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 61.2% on Tuesday last week, down 2.1 points from the previous week. Winter weather affected workers in Washington, D.C., Chicago, and Philadelphia, as Wednesday occupancy fell 36.1 points, 22.3 points, and 13.9 points, respectively. San Jose reached 64.5% occupancy on Tuesday, hitting a new record single-day post-pandemic high. The average low was on Friday at 36.4%, up six tenths of a point from last week.”
Surveys point to cooling activity. From S&P Global’s February Flash U.S. PMI: “The upbeat mood seen among US businesses at the start of the year has evaporated, replaced with a darkening picture of heightened uncertainty, stalling business activity and rising prices. Optimism about the year ahead has slumped from the near-three-year highs seen at the turn of the year to one of the gloomiest since the pandemic. Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments. Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers.”
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.3% rate in Q1.
The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
