Warren Buffett Still Drives Berkshire's Stock Picks as Market Valuation Alarms Sound
Key Takeaways
- •Buffett stated in a CNBC interview that he personally initiated Berkshire's Alphabet stake, which first appeared in the conglomerate's holdings during the third quarter of last year.
- •Greg Abel, who became CEO in December, focuses on overseeing Berkshire's operating subsidiaries and acquisitions, including greenlighting the $6.8 billion Taylor Morrison Home deal, rather than directing equity purchase decisions.
- •Berkshire's Alphabet holding expanded by roughly $17 billion in the second quarter to $37.77 billion, ranking third among its holdings, while subsequent moves in the stocks cut its lead over Coca-Cola to about $20 million by Friday's close.
- •The S&P 500's CAPE ratio rose to 40.6 in July, its highest level since September 2000, and the index has historically never posted positive three-year returns from readings above 40, averaging a 30% decline.
- •Analysts project 50% second-quarter earnings growth for S&P 500 companies, the strongest outside post-recession recoveries, leaving open whether AI-driven earnings strength can sustain current valuations.
Warren Buffett formally transferred the chief executive responsibilities of Berkshire Hathaway to Greg Abel this past December, but recent developments indicate that the handover of the top job has not extended to the equity portfolio. Buffett remains the principal architect behind the conglomerate's stock selections, and the latest quarterly activity makes that clear.
According to Bloomberg News, Berkshire's massive second-quarter purchase of Alphabet shares — a transaction totaling $10 billion — originated from a weekend conversation with Goldman Sachs. While Abel provided swift approval for the deal, sources cited by Barron's reveal that Buffett was the driving force behind the purchase. Speaking in a CNBC interview conducted last month, Buffett stated explicitly that he personally “initiated” the Alphabet position, which first emerged in Berkshire's holdings during the third quarter of the previous year. The size of the trade matters because Berkshire's filings are watched closely for clues about how the company is positioning capital in a market where large indexes are already trading at elevated valuations.
Who Actually Directs the Equity Portfolio
According to Barron's analyst Andrew Bary, Abel lacks substantial portfolio management credentials and is not directing equity purchase decisions. Instead, Abel concentrates on overseeing Berkshire's various operational subsidiaries and pursuing acquisition opportunities on the conglomerate's behalf.
Abel did execute one notable instance of capital deployment. He greenlit the $6.8 billion acquisition of Taylor Morrison Home, although the transaction was finalized after the second quarter came to a close. The quarter's second-most substantial investment, a position in Delta Air Lines, is attributed to portfolio manager Ted Weschler rather than Abel. That division of responsibilities helps explain why Berkshire's stock moves can still reflect Buffett's long-established preferences even as day-to-day leadership shifts elsewhere.
Alphabet Narrowly Overtakes Coca-Cola
Berkshire's Alphabet position expanded by approximately $17 billion during the second quarter, a buildup that elevated the technology giant to third place among the conglomerate's holdings. As of June 30, Alphabet represented $37.77 billion in market value, edging past Coca-Cola, which stood at $32.51 billion.
The two holdings have moved in sharply different directions since that measurement date, with Alphabet declining 3.5% while Coca-Cola surged 12.1%. By Friday's market close, Alphabet's advantage over Coca-Cola had narrowed to a mere $20 million. For Berkshire observers, the comparison offers a snapshot of how a single quarter's allocation decisions can quickly reshape the ranking of the company's largest equity stakes.
Market Valuation Concerns and the CAPE Metric
Beyond the portfolio moves, Buffett delivered a comprehensive market cautionary statement in May. He characterized investors as operating in a “gambling mood” — treating equities like casino bets — and described certain valuations as appearing “very silly.”
Market data lends weight to that concern. The S&P 500's cyclically adjusted price-to-earnings (CAPE) ratio, a valuation metric developed by Nobel Prize winner Robert Shiller, climbed to 40.6 in July. That reading marks the highest measurement for the benchmark since the dot-com market collapse of September 2000. Valuations this elevated for the S&P 500 have occurred during just 3% of the period since the index's inception in 1957.
The historical record following CAPE readings exceeding 40 paints a concerning picture. Starting from such elevated levels, the index has never delivered positive returns over subsequent three-year periods, and the average three-year performance in these scenarios has been a decline of 30%.
Analysts project that S&P 500 constituent companies will deliver 50% earnings expansion in the second quarter, which would represent the most robust growth recorded outside of post-recession recovery periods. Some market observers suggest that strong earnings performance could justify current index valuations, noting that the CAPE metric relies on historical data and does not incorporate prospective earnings trajectories. Whether artificial intelligence-powered earnings strength can sustain current market levels remains an open question.
