The Oracle of Omaha and Wall Street's favorite benchmark are no longer dancing to the same tune.
Over the past three months, a remarkable chasm has opened between Berkshire Hathaway and the S&P 500, with the broad market index outpacing Warren Buffett's sprawling conglomerate by a stunning 30%. It's the kind of divergence that makes investors sit up straight and pay attention.
What's going on here? That's the multi-billion-dollar question.
Historically, Berkshire has tracked reasonably close to the broader market—and why wouldn't it? The company holds massive positions in American blue chips like Apple, Bank of America, and Coca-Cola, not to mention wholly-owned businesses from insurance giant GEICO to railroad operator BNSF. Berkshire has always been something like America's economy in miniature, just with better management and a Nebraskan sensibility.
The explanation for this growing gap isn't simple. Nothing in markets ever is.
For starters, there's what you might call the "Magnificent Seven effect." This recent market rally hasn't been particularly democratic. A handful of tech giants—Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla—have done most of the heavy lifting. While Buffett loves his Apple stock (and I mean LOVES it), Berkshire remains underweight in most of these tech darlings compared to their outsized presence in the index.
Then there's all that cash.
Berkshire is sitting on roughly $157 billion in cash and Treasury bills. That's not a typo. In a raging bull market, that cash pile isn't prudence—it's performance drag. While Buffett and his lieutenant Charlie Munger (God rest his soul) have always preached caution when others are greedy, that philosophy means watching from the sidelines when markets are charging ahead.
I've covered financial markets since 2008, and this reminds me of something we saw back in 1999. Remember when everyone thought Buffett had lost his touch because he wasn't buying Pets.com and other internet high-flyers? We all know how that particular movie ended.
But is this time different? (The four most dangerous words in investing, as the saying goes.)
Look, Berkshire's insurance operations—traditionally the golden goose of the company—have faced real challenges lately. Catastrophic weather events and inflation in claims costs aren't theoretical problems; they're hitting the bottom line. Meanwhile, bank stocks, another Berkshire favorite, haven't exactly been market darlings despite all the interest rate resilience talk.
The gap also highlights a philosophical divide that's been widening for years.
The S&P 500 has increasingly become a technology index in disguise. Nearly a third of it now consists of tech stocks. Berkshire, meanwhile, maintains its value-oriented approach, focusing on businesses with predictable cash flows and reasonable valuations.
When I asked several investment managers about this divergence, they offered a spectrum of opinions. "The market is telling us something about the future," said one portfolio manager who preferred not to be named. "Either Berkshire is massively undervalued, or the broader market is overheating."
Could be both, frankly.
What fascinates me most about this split is what it says about our economic future. The market is essentially pricing in a world where software and AI continue devouring everything while traditional businesses—you know, the ones that make actual physical things or provide real-world services—plod along at a more modest pace.
Is that the economy we're heading toward? Perhaps.
In the meantime, this divergence has created a fascinating natural experiment for investors. In one corner: America's largest businesses, increasingly dominated by technology and growth. In the other: the carefully constructed portfolio of history's most successful investor, still betting on business fundamentals and margins of safety.
Who'll be right in the end? That's why they run the race.
