Markets Brief: A Wild Month Shows Diversification is Crucial

A slew of economic news, company earnings results, and a sharp rise in US stocks was overshadowed last week by news of an epochal change in investing. Warren Buffett announced that he will step down as CEO of Berkshire Hathaway BRK.A/BRK.B at the end of the year.

While it should not be a surprise that a 94-year-old is retiring, the loss of this guiding light of sensible investing will be a blow to many who have benefited from his wisdom and careful capital management over the last 60 years. In addition, it represents a significant change to the United States’ sixth-largest company, which has a cash pile amounting to about $333 billion. You can read more about Buffett’s successor, Greg Abel, here.

Buffett made his announcement following one of the most tumultuous months in market history, which will live long in the memory of investors but will likely be lost in the data, as US equities finished the month only 0.5% lower. In contrast, overseas markets rose, with the Developed Markets ex-US Index up 4.75% and the Emerging Markets Index up 1.4%. However, this was primarily driven by a decline in the value of the dollar following tariff announcements.

There Are Opportunities for Stock Pickers

Consequently, we have started May with similar valuations to those at the start of the quarter, with most markets priced near Morningstar’s assessment of their fair value, according to our Global Convictions Report. Wider gaps are evident at the sector and company level, which favors those who are prepared to follow Buffett’s investing example. You can see these gaps clearly on Morningstar’s dedicated sector pages.

Despite the strong recovery in stock prices, the range of potential outcomes remains unusually wide due to the uncertainty surrounding US economic policy and the responses of other nations.

This uncertainty is evident in how investors and analysts have responded to company earnings reports, which last week included Amazon AMZN, Apple AAPL, Eli Lilly LLY, ExxonMobil XOM, Meta Platforms META, and Microsoft MSFT. Of these, only Microsoft received an uplift to Morningstar’s estimate of its fair value, indicating a lower probability that these companies can convert recent success into greater long-term returns. You can find Morningstar’s take on more company reports here.

Uncertainty is also reflected in the US dollar’s recent decline. This is contrary to what economists would expect following the imposition of tariffs, and indicates that investors are demanding a greater risk premium for US assets.

Beware of Overexposure to US Assets

This provides a good opportunity for investors to consider whether we have the right balance of US and non-US assets in our portfolios. American investors tend to have a very high exposure to US assets, evidenced by the 79% exposure in the Morningstar US Moderate Target Allocation Index, compiled using allocation fund data. Overseas assets are generally priced more attractively and provide diversification benefits if the required risk premium for US assets continues to grow.

When building these positions, remember that overseas markets have different levels of industry exposure than the US. You should consider your portfolio from a sector persepctive as well as a country one. You can find more information about the industry exposure via this screener.

There is a strong consensus among economic forecasters and investors that despite presidential pressure, interest rates will remain unchanged at the next meeting of the Federal Reserve Open Market Committee this week. While last week’s GDP report was far weaker than expected, this primarily reflects an increase in imports in response to the tariffs. The other key measures of the economy, jobs and inflation were benign, supporting an ongoing pause in interest rate cuts.

However, market commentators will be watching the subsequent press conference and speeches given by Fed officials later in the week for signs that the FOMC is caving in to presidential demands for lower rates. You can catch up on all this week’s economic and company announcements on this calendar.