Warren Buffett’s Cash Pile Could Hit $200 Billion as Berkshire Hathaway Reports Earnings
Warren Buffett’s Berkshire Hathaway is expected to report a record-breaking cash hoard topping $200 billion in its second-quarter earnings, exceeding the previous record of $189 billion set in the first quarter. This comes amid a period where Buffett has been selling off some of his favorite stocks, including Apple, Bank of America, and BYD, raising questions about his outlook on the market.
Key Takeaways:
- Berkshire Hathaway’s cash pile is likely to surpass $200 billion, a figure greater than the entire GDP of Hungary.
- Buffett has been selling stock holdings like Apple and Bank of America, which could suggest a more cautious stance on the market.
- While the cash hoard generates significant returns in the current high interest rate environment, those returns are likely to decline as interest rates lower.
- Buffett’s reluctance to invest indicates a lack of attractive investment opportunities, despite a desire to put capital to work.
Berkshire’s Cash Hoard and the Market Outlook
The size of Berkshire’s cash pile has become a subject of intense scrutiny, particularly as it continues to grow in the face of Buffett’s stock sales. Some analysts believe that Buffett’s strategic moves are a sign that he perceives the bull market as becoming overheated and is looking to de-risk his portfolio.
"It does look like he wants to de-risk the portfolio a little bit," said Bill Stone, chief investment officer at Glenview Trust Company and a Berkshire shareholder. "He’s trimming two top holdings and you don’t get anything more economically sensitive than the banks. The market seems so sure right now of a soft landing, and maybe he’s taking more of a contrarian view."
Buffett himself acknowledged at Berkshire’s annual meeting in May that he remains open to deploying capital, but he finds current market valuations to be unappealing.
"I think it’s a fair assumption that [cash holdings] will probably be about $200 billion at the end of this quarter," Buffett said. "We’d love to spend it, but we won’t spend it unless we think [a business is] doing something that has very little risk and can make us a lot of money… it isn’t like I’ve got a hunger strike or something like that going on. It’s just that…things aren’t attractive."
The Impact of Rising Interest Rates
Berkshire’s massive cash pile has been generating significant returns due to the rise in Treasury yields over the past two years. With interest rates reaching multiyear highs, the company has been earning sizable returns on its holdings. However, as the Federal Reserve is expected to begin lowering interest rates, Berkshire’s returns on its cash will begin to decline.
For example, if Berkshire’s cash hoard reaches $200 billion and is invested in three-month Treasury bills at a rate of approximately 5%, the company would generate roughly $10 billion per year, or $2.5 billion per quarter. This level of return could decrease as interest rates move lower.
"It’s just a question of how long they are going to sit on it," Andrew Kligerman, TD Cowen’s Berkshire analyst, said in an interview, referring to the company’s cash pile.
Berkshire’s Other Business Units
Beyond the cash hoard, investors will be examining Berkshire’s quarterly results for other key business units, including BNSF Railway and Berkshire Hathaway Energy. Both businesses have exhibited signs of weakness in recent times.
BNSF Railway is facing challenges stemming from wage increases and revenue declines. Meanwhile, Berkshire Hathaway Energy is grappling with potential liabilities related to wildfires.
"The non-insurance side will weigh on the results, whether it’s the sluggish volumes in railroad coupled with higher labor costs, or utilities, which could put up a good quarter, but nobody’s going to be excited about that just given the liability exposure," Kligerman said.
In contrast, Berkshire’s insurance business has shown strength, boasting a 185% year-over-year increase in insurance underwriting earnings in the first quarter.
Berkshire’s Stock Performance
Berkshire Hathaway shares have performed well this year, rallying over 21% and outperforming the S&P 500’s 14% return. The company’s market capitalization has surged to $956 billion, nearing the threshold of $1 trillion, placing it within a select group of U.S. companies.
The release of Berkshire’s second-quarter earnings will be a major event for the investment world. The report will offer insights into Buffett’s investment strategy and provide a glimpse into the health of his various business units. The market will be watching closely to see whether Buffett’s massive cash pile will remain a dominant force in his portfolio, or if he will begin to invest more aggressively.
