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Thanks to Elon Musk’s hissy fit last week, we now know “boring, bonehead questions aren’t cool.” But some inquiries still deserve to be aired. For instance: Why aren’t investors more happy about this sensational earnings season across the S&P 500? Despite a double-digit jump in profits, Wall Street’s major market benchmark is flat-lining.

The answer may have something to with how difficult it is to find U.S. stocks to get excited about. For evidence of that, look toward the increasingly irritable Mr. Musk and the grandfatherly Warren Buffett.

The two men are, pretty much, opposites. One has too little cash, the other has too much. One wants to disrupt the status quo, the other wants to embrace it. One likes to launch new businesses every year, the other prefers to buy dominant enterprises that have been around for decades.

The one thing this odd couple shares is their recent ability to disappoint investors. Since January, shares of Mr. Musk’s Tesla Inc. have moved erratically up and down, winding up slightly below where they started. So have shares in Mr. Buffett’s Berkshire Hathaway Inc.



To put that another way, neither valour nor value has been a winning strategy recently. No wonder U.S. investors feel stumped.

They’re unlikely to find any easy answers soon. The growing probability of a U.S.-China trade war and Middle Eastern conflict has cast a chill on Wall Street. So has the spectre of rising interest rates, which could boost the appeal of bonds and reduce corporate profits by increasing borrowing costs.

For now, tax cuts are feeding the big profit gains by U.S. companies, but the effect of those cuts will dissipate over the coming quarters. Corporate earnings growth probably peaked in the first three months of this year at an exuberant 22.7 per cent year-over-year, according to consensus estimates compiled by Lori Calvasina of RBC Capital Markets. If the estimates are accurate, and this is as good as it gets, what comes next may prove rather underwhelming for U.S. investors. If so, notes Ms. Calvasina, “recent equity market weakness makes a lot more sense.”

A couple of key indicators add to the case for caution. One is U.S. unemployment, which has sunk to its lowest levels in half a century. The other is corporate profits, which are still unusually high as a share of the overall economic pie. Both economic readings add to the evidence that investors have already seen the best gains of this recovery. Further growth from here is likely to be gradual rather than dramatic.

What should an investor do in this environment? Some people say it makes sense to focus on businesses such as electric-car maker Tesla that have the potential, if things go just right, to expand rapidly despite an overall economy that isn’t growing that fast. Others advise taking haven in cash-rich, value-oriented companies such as Berkshire that can snap up bargains when a downturn eventually comes.

The market has rewarded both viewpoints. Surprisingly, Tesla and Berkshire shares have produced nearly identical returns over the past three years, despite their completely different profiles.

In both cases, though, it’s easy to restrain one’s enthusiasm about what now lies ahead. At Tesla, Mr. Musk sounds more and more rattled as he struggles to stay on top of his company’s debt and production issues. He lectured analysts last week about their dry, boring questions. He told one caller he should sell Tesla stock if he didn’t like volatility.

In contrast, Mr. Buffett offered up a generous helping of bland, soothing optimism at Berkshire’s annual meeting on Saturday. However, he continued to be as evasive as ever about who his successor will be. And neither Mr. Buffett, 87, nor his pal Charlie Munger, 94, shed any light on what Berkshire will do with its US$100-billion cash hoard.

Investing in either company requires a leap of faith. So, for that matter, does leaping into the broad U.S. market. At some point, investors are likely to notice that other stock markets in other countries offer substantially better valuations. It’s a realization that is long overdue.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 23/05/24 4:00pm EDT.

SymbolName% changeLast
TSLA-Q
Tesla Inc
-3.54%173.74

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