Berkshire’s Growing Cash Pile Has A Hidden Message On Stocks

Authored by Ven Ram, Bloomberg cross-asset strategist,

US stocks are seeing no evil and certainly hearing none, but Berkshire Hathaway’s ever-growing cash pile should hold a tacit warning for those who are overexuberant.

Berkshire’s war chest surged to a record $189 billion at the end of the first quarter, and Chair Warren Buffett told shareholders over the weekend that he expects the pile will rise to $200 billion soon:

“We’d love to spend it, but we won’t spend it unless we think we’re doing something that has very little risk and can make us a lot of money.”

Wall Street, of course, equates higher return with higher risk, but here is one of the best investors of all time decrying the very notion that one needs to do something egregiously risky to earn the additional dollar of return over and above what is available to passive investors who buy the entire market.

Stocks rallied on Friday after the markets interpreted the April non-farm payrolls data as providing just the right backdrop for the Federal Reserve to cut rates eventually. Considering that since of the end of 2022 alone, the S&P 500 has surged about 33% and the Nasdaq almost 50%, one would think that all the good news out there and more is already reflected in their price tag.

Over the long term, stocks can’t yield returns in excess of corporate earnings and economic growth, but investors have been in no mood to listen — and they may yet stay complacent in the short term. The S&P 500 now promises an earnings yield of less than 5%, well below the historical average. The Nasdaq 100 is, of course, trading even loftier, offering a prospective earnings yield of less than 4%.

At the moment, investors are paying a lot for stocks on the premise of promise. That is what Buffett may characterize as too much risk.