Buffett’s on the Sidelines – Should You Follow?

Key Points

• Warren Buffett and Berkshire Hathaway moved into cash in 2024, suggesting stocks are overvalued and ready for a correction.
• Even so, a stock market correction is unlikely to fall deeply because the outlook for earnings growth remains positive.
• The S&P 500 may trend sideways until later in 2025, when headwinds ease, and new catalysts emerge. 

Warren Buffett and Berkshire Hathaway NYSE: BRK.A always make headlines in February when the firm holds its annual meeting. Among the many takeaways is what the company has been buying and selling and how invested it is in the market. A critical detail from the 2025 meeting is that Berkshire Hathaway’s cash pile hit a record high, suggesting the Oracle of Omaha and his investment Colossus are on the sidelines. 

The cash pile didn’t just grow; Berkshire Hathaway’s cash pile ballooned by nearly 70%, rising by $134 billion to over $330 billion, more significant than the market cap of 94% of the S&P 500 NYSEARCA: SPY. The cash build is due to massive sales in top names like Bank of America NYSE: BAC, Apple NASDAQ: AAPL, American Express NYSE: AXP, and The Coca-Cola Company NYSE: KO, suggesting they are overvalued and at risk of a significant correction. 

Holdings in BAC and AAPL were cut the hardest, trimmed by 25% and roughly 65%, respectively, but large portions of all positions were liquidated. Conversely, Mr. Buffet’s buying was not significant, falling short of $6 billion, suggesting there wasn’t much interesting other than Occidental Petroleum NYSE: OXY. Berkshire’s holdings in that stock increased by double-digits during 2024, and additional buys were made in 2025. 

The Risk Is the FOMC, Inflation, and Donald Trump

The risk for the stock market is the impact of Donald Trump’s policies on an already-strained economic situation. His policies are expected to sustain higher-than-wanted inflation due to tariffs and increased domestic demand, likely keeping the FOMC from lowering interest rates. The question is if inflation will hold steady at its current pace or accelerate as it did in the second half of 2024. If inflation continues to accelerate, the FOMC must raise interest rates to combat inflation, which could easily tip the economy into a recession. 

Trump’s policies also include mass layoffs. The Department of Government Efficiency (DOGE) is cutting government jobs by the thousands and will impact the labor market generally. That is bad news for employment data and the consumer outlook, but it may have a silver lining. Reducing government jobs may offset Trump’s inflationary pressure enough to keep it from accelerating consumer-level inflation so that rate hikes come back onto the table. As it is, the CME FedWatch Tool indicates a 92% chance for one 25-basis point rate hike by year’s end and about 70% chance for two. 

Broadening Economic Activity and Earnings Growth Are the Opportunity

The opportunity for investors is that the United States will avoid recession, and Trump’s policies will not significantly accelerate inflation. The U.S. economy will remain strong, and corporate earnings will grow in this scenario, a bullish environment for stocks compounded by the expectation of broadening activity. Easing regulatory and tax hurdles are expected to bolster economic activity across sectors, leading to a broader rally in stocks, another good reason for Mr. Buffett to raise cash. In that light, Berkshire’s sales in 2024 were precautionary but also preparatory, raising capital for deployment into new investments. 

So, the S&P 500 is set up to fall but is not likely to fall far because the outlook for economic and earnings growth is dimming but still positive. A price correction in early 2025 may only fall as much as 5.5% from the all-time high, finding support at the January low, but there is a risk of a deeper correction because the forecasts could continue to decline. The critical support zone is 5,725 to 5,780; if broken, this market could retreat to 5,400 or deeper before hitting solid support. 

Catalysts for the market include tariff relief, easing inflation, and lower interest rates, but they are not likely to emerge until later in 2025. The S&P 500 could remain in a holding pattern until then, trending sideways within the established range.