2025 Q2 Mid-Quarter Market Update – Volatility, Patience, and Opportunity

94 Years Young! 

On Friday, May 2, the shares of Berkshire Hathaway closed at a record high. The next day at the company’s annual shareholder meeting in Omaha, Nebraska, its famed CEO and legendary investor, Warren Buffett, 94, announced that he would give up the CEO role at the end of this year after an incredible 60 years at the helm. Since he became CEO in 1965, the shares have risen 5,502,284% through the end of last year, equating to a compound annual return of 19.9%, almost double the S&P 500’s return of 10.4% over the same period.¹Harring, Alex. “Warren Buffett’s Return Tally After 60 Years: 5,502,284%.” CNBC, 5 May 2025, https://www.cnbc.com/2025/05/05/warren-buffetts-return-tally-after-60-years-5502284percent.html. The company currently has a market value of $1.1 trillion.²Stempel, Jonathan, et al. “Buffett to Remain Berkshire Chairman but Shares Fall After Abel Named CEO.” Reuters, 5 May 2025, www.reuters.com/markets/us/berkshire-hathaway-shares-fall-buffett-step-down-ceo-year-end-2025-05-05.

We wrote about Buffett two years ago when he turned 93 and discussed the amazing cash generation of his conglomerate. Buffett is known as a value investor willing to buy whole companies or take a passive stake in firms at fair prices and patiently hold those investments for many years, if not forever. The shares fell about 5%³Stempel, Jonathan, et al. “Buffett to Remain Berkshire Chairman but Shares Fall After Abel Named CEO.” Reuters, 5 May 2025, www.reuters.com/markets/us/berkshire-hathaway-shares-fall-buffett-step-down-ceo-year-end-2025-05-05. on the news of him handing the CEO job over to his successor, Greg Abel, but are still up 13%⁴Ferré, Ines. “Berkshire Hathaway Stock Drops After Board Approves CEO Warren Buffett’s Successor.” Yahoo Finance, 5 May 2025, https://finance.yahoo.com/news/berkshire-hathaway-stock-drops-after-board-approves-ceo-warren-buffetts-successor-201256298.html. for the year despite the great volatility seen in markets so far in 2025, particularly over the last month.   

How is it that Berkshire has delivered double-digit returns in 2025 despite all the tumult around tariffs, recession risks, and geopolitical conflicts around the world? Investors reward their diversified businesses and the cash those businesses generate. Buffett has also chosen to amass an enormous cash position of $350 billion.⁵Estrada, Sheryl. “Warren Buffett Will Leave His Successor Nearly $350 Billion in Cash—where the Money Is Parked and How It Could Be Used.” Yahoo Finance, 6 May 2025, https://finance.yahoo.com/news/warren-buffett-leave-successor-nearly-100000927.html. At the annual meeting, he said that in time, the opportunities will present themselves to deploy that cash. The lessons of Buffett’s success are ones that we hold dear especially in times of great turbulence: patience, discipline, and diversification. Buffett’s life and career are remarkable, and he is still not retiring! He will continue serving as Chairman of Berkshire’s board of directors next year and beyond.

The Tariffs and Trade Negotiations 

Markets are very relieved that trade negotiations are underway with major trading partners, including China.  After an initial panic over the announcement of reciprocal tariffs on April 2, a recovery took hold once the reciprocal tariffs against all countries, except China, were delayed 90 days. Now there is a 90-day pause with China too, and trade can restart in time for holiday orders. Stocks have continued to enjoy a strong recovery with trade talk progress and solid first quarter earnings reports, but with the clock ticking — investors may get impatient, and markets could easily fall back again. Trade negotiations are typically painstakingly long which may result in extensions to tariff pauses to avoid additional market tremors. 

The Federal Reserve and Inflation  

The uncertainty about where we will end up with tariffs has also caused the Federal Reserve to hold off on cutting interest rates, as Chair Jerome Powell has expressed concerns about the inflationary impacts of tariffs. The expectation is that they may cut rates in July but are more likely to do so in September. There is debate about whether or not tariffs are inflationary. While prices will rise based on new tariff rates, it should be more of a one-time price increase unless tariff rates keep rising. Tariffs are a form of taxation. Beyond inflation concerns is the potential disruptive impact on supply chains, corporate margins, and economic growth from consumers buying fewer goods. If we see a spike in unemployment in the coming months, the Fed will likely more aggressively cut rates and possibly even begin buying bonds to stimulate the economy.

Can AI Productivity Offset the Impact of Tariffs?   

The pace of improvement in the capabilities of artificial intelligence (AI) models is fast and furious. The market, especially the technology sector, was reassured by the big capital spenders in AI like Microsoft, Amazon, Alphabet (Google), and Meta (Facebook) in recent earnings calls that their investments in the buildout of AI infrastructure and capabilities will continue as planned. The breakthroughs keep coming. For example, AI models can now transform text commands into instant videos. Those videos, however, have so far had limited motion ability.  On May 5, Science Daily reported that researchers at the University of Rochester, in collaboration with other institutions, have been able to train models to learn about the physical world through time-lapse videos.⁶“Text-to-video AI Blossoms With New Metamorphic Video Capabilities.” ScienceDaily, 25 May 2025, https://www.sciencedaily.com/releases/2025/05/250505170633.htm.  A user can text a command to see a tree sprouting or a flower blooming instantly. This capability can therefore simulate chemical, biological, and physical interactions, which potentially have very exciting implications in areas like the acceleration of drug discovery, building design and construction, and the classroom experience. In the coming quarters, more evidence should emerge of productivity enhancements across all industries, thanks to AI applications, which can help profit margins at firms hurt by tariffs.

Buffett’s Sage Advice

Warren Buffett is famous for his folksy but wise investment advice. His comment “Risk comes from not knowing what you are doing” resonates. Our well–diversified investment program has weathered difficult periods before and is handling this year’s volatility well. The program’s meaningful exposure to international equities and the stability that fixed income has provided has allowed the overall investment returns to hold up well despite the S&P 500’s modest year-to-date decline of 0.18% through May 12.⁷Source: Morningstar Direct. Data as of 5/12/25.  He also has said, “Be fearful when others are greedy and greedy when others are fearful.” In other words, have the discipline and fortitude to buy low and sell high. Our very disciplined approach to rebalancing does just that to take full advantage of market dislocations, as we have in prior market dislocations like the internet bubble popping in 2000, the financial crisis in 2008-09, COVID in 2020, and the spike in inflation and interest rates in 2022. However long this volatility persists, we are confident in our approach to building durable portfolios that will drive long-term success.

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