🇯🇵 Warren Buffett, the Oracle of Osaka

What’s Going On Here?

Data suggests US companies are bracing for a blow to profit this earnings season.

What Does It Mean?

Earnings season is just around the corner, and the outlook for US businesses isn't too hot right now: with recession fears and cash-strapped customers holding back demand, companies are seriously feeling the pinch. Add increasingly expensive raw materials and borrowing costs to the mix too, and you've got the perfect recipe for skinny margins and underwhelming profit. No wonder Wall Street's earnings forecasts fell by more than the past five-year average last quarter, with more and more companies sounding the profit-warning alarm. All things considered, S&P 500 companies are expected to report a 6.8% dip in earnings last quarter compared to the same time the year before – the biggest drop in profit since the early days of the pandemic, when lockdowns triggered a plunge of over 30%.

Why Should I Care?

For markets: Picking up the slack.

With such a gloomy outlook, you might wonder why the stock market isn't having a minor meltdown: instead, the S&P 500 has increased by over 7% since the start of the year. But take a closer look, and a different picture emerges. Nearly 90% of that rise was down to the success of just 20 firms – many of them big technology companies – whose brawny share prices have masked the frailty of their peers.

The bigger picture: Don’t be hasty.

Sure, most industries are set to shrink, but hospitality-related industries, travel, and energy seem to be on track for profit growth. That doesn’t mean you should start overhauling your portfolio lickety-split, though: remember, these are just expectations – and stocks’ performance from here on out will depend on how they stack up against the cold, hard reality. And nothing’s a sure bet right now, with analysts warning that the fallout of recent bank failures could spill into next quarter too.

What’s Going On Here?

Warren Buffett’s Berkshire Hathaway could be poised to up its stake in Japanese firms.

What Does It Mean?

Japan's trading houses play a vital role in the Land of the Rising Sun, especially given the country's limited natural resources. The jack of all trades import everything from food to energy, and they’ve been pivotal in expanding and globalizing Japan's economy. They’ve also caught Buffett’s eye: when the pandemic hit back in 2020, he spotted an opportunity and poured $6 billion into them – and that bet, which the firm topped up late last year, has netted Berkshire Hathaway a cool $4.5 billion in gains. No surprise, then, that Buffett’s flirting with the idea of increasing Berkshire's 7.4% stake in the trading houses. There are also some new stock investments on the table: Buffett's even trekked out to Japan, where he’s currently catching up with key business leaders.

Why Should I Care?

For markets: Buffett’s blessing.

Buffett's track record is a testament to his first-class business acumen, and his interest in Japan suggests there could be some more golden nuggets waiting to be discovered. Plus, Berkshire kicked off a yen-denominated bond sale this week, signaling that the firm could be getting ready to splash the cash in Japan pronto. If you fancy trying to get ahead of those moves, keep Buffett’s preferences in mind: well-managed companies, with strong competitive advantages, that look undervalued. But finding them is easier said than done…

The bigger picture: Just what Japan needed.

Buffett's Japanese dalliance is good news for the country's markets, and the all-important Nikkei 225 index took a leap when the news broke. That’s no wonder: Buffett’s stellar credentials might tempt foreign investors to waltz back into a market that’s witnessed more foreign selling than buying of late. Any newfound interest in Japanese stocks could ignite a spark of domestic optimism too – fueling spending and giving the economy a much-needed boost.