By Greg Bartalos

The stock market is in a seasonally strong period but investors may want to pull in their horns. That seems to be what Warren Buffett's Berkshire Hathaway is doing. This past Saturday, the company announced better-than-expected third-quarter operating profits, but its recent investment moves suggest that management is cautious about the stock market.

Berkshire's cash and equivalents rose to a record $381 billion at the end of September, increasing $37 billion from the previous quarter. The company also didn't buy back any of its shares, continuing a trend that began in May 2024. Berkshire was a net seller of $6 billion of stocks in the third quarter, its 12th straight quarter of net sales. Perhaps we should call him "Warn" Buffett from now on?

The Buffett Indicator, which reflects the ratio between the stock market's total market capitalization to GDP, stands at 220%. Buffett previously characterized anything above 200% as "playing with fire." Moreover, the CAPE ratio (an acronym for the Cyclically-Adjusted Price-to-Earnings Ratio), a popular albeit much contested method for valuing stocks, is pointing to rough years ahead for the S&P 500. However, the ratio suggests that small-caps as well as European and emerging market stocks could do well in the next decade.

Berkshire appears well positioned for the future with Buffett, 95, handing the reins to Greg Abel, who will succeed Buffett as CEO at year-end. What's striking is that since Buffett announced on May 3 that he would step down as CEO after 60 years at the helm, Berkshire's stock has underperformed the S&P by almost 30 percentage points.

The sharp divergence reflects succession uncertainty and concerns about Berkshire's large cash cushion, the absence of stock buybacks, and its lack of AI exposure at a time when investors have gone gaga for tech and AI.

However, amid mounting concerns about AI spending, Palantir's highflying stock tumbled yesterday and fell further today after the company reported earnings and news reports indicated that Michael Burry is shorting Palantir and Nvidia. If investors want to buy the dip they can keep riding the now wobbly AI pony. Those who are particularly comfortable with risk and volatility could buy crypto, which has been hammered in the past month with Bitcoin down 16% and Ethereum down 28%.

If you think Berkshire's caution is warranted, you could buy or redeploy some tech/growth/crypto holdings into less speculative parts of the market with better valuations. Bank CEOs expect stocks to fall given this year's concentrated rally, lofty valuations, the government shutdown, and uncertainty about tariffs and credit markets.

Although rewards have gone to the bold this year, it may be time to play defense by embracing defensive stocks and sectors, which this year have lagged behind the more tech-oriented S&P 500.

The ratio of stock prices of defensive names compared with those of economically sensitive ones is near its lowest in more than 12 years, according to Evercore ISI strategist Julian Emanuel. Defensive stocks look cheaper, too. At 19 times 12-month forward earnings, the Consumer Staples Select Sector SPDR ETF trades below its five-year average and about four points below the S&P 500's multiple of 23 times forward earnings.

Lastly, flows into defensive stock funds in developed markets recently reached their highest level since April.

So far this week, the Nasdaq is down 2% while Berkshire is 3% higher. A sign of things to come?

Write to Greg Bartalos at greg.bartalos@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

November 05, 2025 14:54 ET (19:54 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.