The US stock market has been on a roller coaster ride in the past week, as investors grappled with the implications of rising inflation, interest rates, and geopolitical tensions. The S&P 500 and the Nasdaq Composite both suffered their worst weekly losses since February, while the Dow Jones Industrial Average managed to eke out a small gain. The market rally that started in March 2020 seems to be at an inflection point, as some sectors and stocks show signs of weakness, while others remain resilient.
Berkshire Hathaway Earnings: A Mixed Bag
One of the most anticipated earnings reports of the season came from Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B), the conglomerate that owns a diverse portfolio of businesses and investments. Berkshire reported its second-quarter earnings on Saturday, ahead of its annual shareholders meeting in Los Angeles.
The results were a mixed bag, as operating earnings, which reflect the profits from Berkshire’s core businesses, rose by 12% year-over-year to $8.065 billion, beating analysts’ expectations. However, net earnings, which include the gains or losses from Berkshire’s investment portfolio, fell by 8% to $3.87 per share, missing estimates.
The main driver of Berkshire’s operating earnings growth was its insurance underwriting business, which posted a profit of $911 million, up from $167 million a year ago. This was largely due to Geico, the auto insurer that returned to profitability after six quarters of losses. Geico benefited from higher average premiums and lower advertising spending, as well as lower claim frequencies due to the pandemic.
However, Berkshire’s other major segments, such as utilities and energy, railroads, manufacturing, and retailing, saw their earnings decline or stagnate compared to last year. This reflects the challenges that many of Berkshire’s businesses faced amid the economic slowdown and supply chain disruptions caused by Covid-19.
Berkshire also revealed that it bought back $4.4 billion worth of its own shares in the second quarter, up from $2.8 billion in the first quarter. This was the most since the first quarter of 2021, when Berkshire repurchased $6.6 billion worth of stock. Buffett has been using his massive cash pile of $130.6 billion to buy back shares, as he has struggled to find attractive acquisition targets in the inflated market.
Market Reaction: A Muted Response
The market reaction to Berkshire’s earnings was muted, as the stock fell by 1.1% on Friday to close at $349.99 per share. The stock is slightly extended from a buy point of $331.84 that it cleared decisively in early June. However, it is still lagging behind the S&P 500 index, which is up by 17% year-to-date.
Some analysts have argued that Berkshire’s stock is undervalued, given its strong balance sheet, diversified earnings streams, and high-quality businesses. They also point out that Berkshire has exposure to some of the most promising sectors in the post-pandemic economy, such as technology, energy, and financials.
However, others have questioned whether Berkshire can maintain its competitive edge and growth potential in the long run, as it faces increasing competition from nimble and innovative rivals. They also wonder whether Buffett and his 99-year-old partner Charlie Munger can continue to lead the company effectively, given their advanced age and succession uncertainty.
Outlook: A Cautious Optimism
At the annual meeting, Buffett and Munger answered questions from shareholders for over five hours, covering topics ranging from inflation to cryptocurrencies to China. They expressed a cautious optimism about the US economy and their own businesses, while acknowledging the risks and uncertainties ahead.
Buffett said that he expects most of Berkshire’s businesses to report lower earnings this year than last year, as the “incredible period” for the economy is coming to an end. He also warned that inflation is a “very serious” problem that could hurt both consumers and businesses.
Munger said that he expects value investing, which involves buying stocks that are cheap relative to their intrinsic value, to become more difficult in the future. He advised investors to “get used to making less” in this environment.
However, they also praised some of their top holdings, such as Apple (AAPL), Bank of America (BAC), and Occidental Petroleum (OXY), for their strong performance and growth prospects. They also defended their decision to invest in Chevron (CVX), despite criticism from environmental activists.
They also reiterated their confidence in America’s long-term prospects, saying that they are “100% sure” that the country will overcome its challenges and continue to prosper.
