Can Berkshire Hathaway Stock Keep Outpacing the S&P 500?

Berkshire Hathaway (BRK.A -2.17%) (BRK.B -1.27%) CEO Warren Buffett is widely considered a legend on Wall Street, and for good reason. The conglomerate's portfolio has substantially outperformed the benchmark S&P 500 since Buffett became CEO in 1965.

The graph below illustrates this point:

BRK.A Total Return Level data by YCharts

A contrarian approach to investing

Moreover, Buffett's investing methodology runs counter to modern portfolio theory and the efficient markets hypothesis.

Modern portfolio theory advocates for diversification as a risk-management strategy. According to this theory, spreading investments across various assets reduces risk, thereby increasing the probability of generating positive annual returns.

However, Buffett's approach is anything but diversified. Berkshire Hathaway's portfolio is concentrated, with approximately 50 stocks in its holdings at the time of this writing.

Moreover, a select few equities such as Apple (AAPL 0.17%), Bank of America (BAC -0.50%), American Express (AXP 0.16%), Chevron (CVX -0.84%), Coca-Cola (KO 1.60%), and Occidental Petroleum (OXY -1.12%) account for a staggering 76.6% of the conglomerate's stock investments.

By contrast, most of Buffett's money manager contemporaries have typically crafted portfolios consisting of hundreds -- and sometimes thousands -- of equities, in line with the main tenet of modern portfolio theory.

Buffett and his team have also overcome the potentially disadvantageous effects stemming from the legal requirement to disclose their quarterly buys and sells. The efficient market hypothesis suggests that such disclosures should nullify Buffett's edge by allowing other investors to mimic his portfolio.

Surprisingly, this constraint hasn't significantly impacted the company's ability to deliver excess returns relative to the broader market.

In 2024, for instance, Berkshire Hathaway's shares have outperformed the sizzling S&P 500, and historically, the company has delivered returns in excess of the broader market by around 8 percentage points per year.

Can Berkshire Hathaway keep beating the S&P 500?

When considering the likelihood of Berkshire Hathaway's stock outperforming the S&P 500, it's essential to analyze the company's principal stock holdings and key economic metrics, and then compare these with the benchmark index.

The six largest stock holdings in Berkshire's portfolio have an average forward price-to-earnings (P/E) ratio of 18.3 and anticipated earnings growth of 12.4% by 2025 (see table below).

Data source: Yahoo! Finance.

In contrast, the S&P 500 index is trading at a higher forward P/E ratio of 21.1, with an expected average earnings growth rate of 14.2% for the same period, according to FactSet analysts.

Although Berkshire Hathaway's core stock holdings are relatively more affordable, they are projected to have a marginally lower earnings growth rate.

Turning to Berkshire Hathaway stock itself, the company's shares are trading at a forward P/E ratio of 18.8 and are predicted to have earnings growth of 2.4% for the following year.

This significantly lower earnings growth rate suggests that Berkshire Hathaway's stock may not be well positioned to outperform the S&P 500 in the short term.

Cut from a different cloth

Still, a deeper analysis is ultimately required to answer the original question, because Berkshire Hathaway isn't a typical stock.

Buffett and his team have amassed a diverse portfolio of assets, including stocks, bonds, businesses, and a substantial cash reserve. This multifaceted approach sets it apart from most other companies.

What does this all mean in practical terms? Due to its diverse asset portfolio, Wall Street regards Berkshire Hathaway as an exceptional hedge against broad market downturns.

Unlike the S&P 500, which lacks built-in downside protection, Berkshire Hathaway's strategic composition provides a safety net during turbulent times.

Uncertainty looms

Now, let's explore why this distinction matters. The S&P 500's recent bull market surge owes much to the enthusiasm surrounding artificial intelligence (AI). Notably, Nvidia (NVDA 1.25%) -- the chipmaker at the forefront of the AI revolution -- holds the second-largest weight within the S&P 500. Consistently surpassing Wall Street's earnings expectations, Nvidia has become a linchpin for the index's performance lately.

However, here's the crux: If Nvidia encounters any obstacles, ripple effects could reverberate throughout the entire U.S. stock market. In contrast, Berkshire Hathaway maintains limited exposure to this AI-centric theme. Its substantial focus lies in sectors such as finance, energy, and consumer goods, shielding it to a degree from the hype surrounding AI.

Although Apple is Berkshire Hathaway's largest holding by a country mile, the tech giant doesn't rely on AI to fuel sales. Instead, Apple leverages its loyal customer base to drive sales of its iconic iPhone. Berkshire Hathaway, in turn, isn't overly reliant on AI to drive its share-price performance, counter to the broader market.

All roads lead to Nvidia

Berkshire Hathaway's ability to outperform the S&P 500 in the short term hinges on Nvidia's trajectory. Should Nvidia continue to exceed Wall Street's estimates by a wide margin, Buffett's conglomerate is unlikely to best the S&P 500 over the next 18 months.

However, a more profound concern looms: The S&P 500 appears markedly overvalued based on its cyclically adjusted price-to-earnings ratio. Furthermore, its bull run appears overly reliant on a single stock.

Perhaps most concerning is that Nvidia's shares are trading at over 42 times forward earnings. This premium valuation may be warranted, but it also suggests that a fair amount of the chipmaker's near-term upside is already accounted for, curtailing its power to drive the S&P 500 much higher.

A favorable scenario for Berkshire Hathaway

If investors balk at paying this hefty premium for Nvidia, Berkshire Hathaway should deliver superior results relative to the benchmark index over the next 18 months.

In other words, Nvidia stock may lose momentum as investors search for more attractive growth vehicles. This dynamic that favors companies like Berkshire Hathaway -- namely, ones that aren't entirely dependent on AI to create shareholder value.

Berkshire Hathaway, despite its unfavorable econometrics relative to the S&P 500, could thus deliver strong returns for shareholders over the remainder of 2024 and the whole of 2025 if this scenario plays out.

That's a testament to Buffett's slow-and-steady approach to value creation, which has consistently beaten the broader markets over the past seven decades and counting.