I continue to 'sit tight'; Alphabet remains my favorite Magnificent Seven stock; Interview with Alice Schroeder, author of Warren Buffett's definitive biography
1) It only took a month for the S&P 500 Index to recover from its post-"Liberation Day" decline, as this chart from Bespoke Investment Group on social platform X shows:
The index is now only down 8.3% from its all-time high in mid-February and 4.3% year to date.
First-quarter earnings-per-share growth so far is 12% among S&P 500 companies, double the forecast of 6%, as you can see in this chart from The Transcript:
Volatility, as measured by the CBOE Volatility Index ("VIX"), has plunged by 50%, the second-biggest four-week decline in history. Historically, this has almost always been a good omen for the market, as the charts below show, courtesy of Charlie Bilello's latest Week in Charts:
And the Federal Reserve, as expected, kept rates unchanged yesterday following its May meeting, as recapped in this Wall Street Journal article: Fed Warns of Rising Economic Risks as It Leaves Rates Steady.
So is it safe to get back in the market?
I'm not convinced...
The Bloomberg Economics Global Trade Policy Uncertainty Index is off the charts, as this post by Charles Schwab's Chief Investment Strategist Liz Ann Sonders shows:
I think the risk of Armageddon is much lower today than it was in the immediate aftermath of Liberation Day, and this is reflected in the market's sharp recovery so far. So I'll echo what I wrote on April 29:
I continue to believe that broadly "sitting tight" is the best move – neither buying nor selling across the board.
I think the Trump administration is going to ease up on tariffs, but a lot of short- and long-term damage has already been done.
2) Alphabet (GOOGL) shares tumbled 7.3% yesterday after Apple's (AAPL) senior vice president of services, Eddy Cue, testified in a federal trial that Google searches in Apple browsers fell for the first time in more than two decades. (This trial was conducted to determine remedies for Google's illegal search monopoly, which was ruled in April.)
According to Cue, this drop is due to people using ChatGPT, Perplexity, and other AI search tools – presumably instead of Google.
He added that Apple has considered adding an AI provider as a search choice into its Safari browser: "That's something we're actively looking at... We've been pretty impressed with what Perplexity has done, so we've started some discussions."
He also said Apple has spoken to OpenAI, which operates ChatGPT, and would expect other AI choices to be added to Safari as they improve more and more.
Alphabet closed yesterday at $151.38, not far above its 52-week low of $140.53. And the stock is pretty much back to where it was three and a half years ago, as you can see in this five-year stock chart:
Yesterday's news doesn't change my bullish view on the stock: Alphabet is investing heavily in AI, and I think it'll be one of the winners. I'm already noticing high-quality AI results in my traditional Google searches, so I rarely use the ChatGPT Plus service I'm paying $20 per month for (that said, it's still useful for such a low price, so I'm happy to keep paying for it).
And I'm not worried about the Department of Justice's lawsuit either, because I think if Alphabet is broken up, the pieces will be more highly valued than the current whole.
As I detailed in my April 25 e-mail:
Alphabet recently boasted the lowest price-to-earnings multiple among the "Magnificent Seven" mega-cap stocks...
It makes no sense that one of the greatest businesses of all time trades at a lower multiple than the average large U.S. business.
My view today – as it has been for more than six years – is that Alphabet is a great stock for conservative, long-term-oriented investors.
3) Having written my last three e-mails about Berkshire Hathaway (BRK-B) and its CEO, Warren Buffett, I'm going to move on... But before I do so, I wanted to share a link to an interview Business Insider did with Alice Schroeder, author of the definitive biography The Snowball: Warren Buffett and the Business of Life: Warren Buffett's biographer tells BI he's 'literally not replaceable' as Berkshire Hathaway enters a new era (subscription required). In it, she talks about expectations investors should have:
Warren has been very candid in saying: Don't expect the company's results to be that much better – or necessarily any better – than the market as a whole over the long term after he's gone. Well, the long term has arrived, and now a lot of things are going to change.
I think Berkshire has tremendous advantages. It's got internal diversification, it's got strong, stable businesses. Those will obviously survive. And I think he will achieve the one goal that he told me he had a long time ago, which is that he constructed it to survive and still be a viable, reasonable, successful company for 30 years after he's no longer running it. So I think those who own the stock should not be worried because the business side could be almost put on autopilot, but there's a certain element of magic that is departing now, of course.
I agree with Schroeder that Berkshire's stock, at today's full valuation (which I discussed in yesterday's e-mail), isn't likely to outperform the S&P 500.
Regarding Berkshire starting to pay a dividend, she commented:
Berkshire has been, for some time, generating much more capital than it can use. So I think that the possibility of a dividend could be there under someone other than Warren. But I wouldn't expect Berkshire to change its approach to managing risk or asset liability management or anything like that.
Do you think a dividend might be a short-term play to reassure investors after his departure?
I don't think a dividend will be announced in the short term. I think that it will go from being absolutely ruled out to being potentially on the table at some point.
I disagree slightly with her here – I actually think Buffett would want to make the decision to start paying a dividend, to remove the pressure around this critical step from his successor, Greg Abel, and the board.
I don't think he'll do anything for now, in light of the possibility of further market turmoil that could provide him with opportunities to put Berkshire's $348 billion cash hoard to work. But if cash continues to pile up by the end of this year, one of his last acts before he officially steps down as CEO on December 31 might be to announce both a special dividend ($100 billion?) and an ongoing one (3%?).
Lastly, I want to highlight what Schroeder said about how Buffett has influenced her personally:
I learned almost everything I know about dealing with people, managing people, and negotiating from him, including in my personal life. I credit him with making a major change in my marriage, and I'm now very happily married to my second husband, and that is directly, directly due to Warren Buffett.
I don't think I've ever told this story, but when I got married to my second husband, he had veto power over who I chose. That's how much I trust his judgment about people. I was happy to give him veto power. Thankfully, he liked David.
He is amazing at dealing with people...
I feel the same way: that I'm a better person and have stronger relationships with family and friends because of what I've learned from him.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.