Buffett Predicts a Downturn. Inflation Data and Earnings Will Indicate Its Severity.

Concern still lingers though, particularly as the banking turmoil appears to be sticking around, although regional banks continued to rebound in premarket trading early Monday.

Adding to the uncertainty, the Federal Reserve’s job is getting increasingly difficult. The central bank has moved to a more data-dependent approach, which opens the door to multiple outcomes.

The market is pretty convinced that last week’s interest-rate hike will be the last of the current cycle. Inflation data due Wednesday—April’s consumer price index—will play a key role in whether that proves to be the case.

The latter stages of earnings season will provide further insight into the health of the economy, with PayPal, Airbnb, and Disney among those reporting this week.

Warren Buffett sees a downturn coming, predicting earnings to decline at the majority of Berkshire Hathaway’s businesses, at the company’s annual meeting Saturday. Berkshire is considered an economic bellwether given the breadth of its U.S.-oriented exposure.

First-quarter earnings in general appear to back up Buffett’s forecast, though things have been nowhere near as bad as expected. S&P 500 companies are having their best earnings season relative to analysts’ expectations since the end of 2021, according to FactSet. The index is on track for a 2.2% annual earnings decline—at the end of March analysts were predicting a 6.7% drop.

Perhaps more significantly, 58% of companies issuing full-year guidance have delivered a positive surprise. The economy is continuing to defy recession forecasts.

—Callum Keown

*** Join Barron’s senior managing editor Lauren R. Rublin and deputy editor Ben Levisohn today at noon when they speak with Andrew Slimmon, managing director at Morgan Stanley Investment Management, about the outlook for financial markets, industry sectors, and individual stocks. Sign up here.

Try your hand at this morning’s Barron’s digital jigsaw, which is based on the week’s cover story. For all games, including the daily crossword and sudoku, click here.

***

Updates This Week: PayPal, Disney, Airbnb and More

This week features earnings from PayPal Holdings, Airbnb, and Walt Disney among other reports. The economic highlight will come Wednesday, when the Bureau of Labor Statistics releases the consumer price index for April.

• Economists forecast a 5% increase in the CPI for the month, matching the March gain. The core CPI, which excludes volatile food and energy prices, is expected to rise 5.4%, slightly less than previously. Both indexes are well below their peaks from last year.

• Disney
  reports second-quarter fiscal-2023 results on Wednesday. Analysts expect earnings per share of 95 cents on revenue of $21.8 billion, including $14.1 billion from media and entertainment. The company’s battle with Florida Gov. Ron DeSantis over a tax district continues with a lawsuit and countersuit filed.

• PayPal
  reports today after the closing bell. Analysts expect the payments firm to report EPS of $1.10 on revenue of nearly $7 billion. Active accounts are seen rising to 437.7 million, while total payment volume is expected to dip to $344.8 billion from the fourth quarter.

• Airbnb
  will report Tuesday. Analysts expect EPS of 21 cents on revenue of $1.79 billion. Gross booking value for the hosting and experiences site is expected to be $20.1 billion, up from the fourth quarter and last year’s first quarter.

What’s Next: The University of Michigan releases its consumer sentiment index for May on Friday. Economists forecast a dour 62.6 reading, about one point lower than in April, as inflation expectations remain high.

—Liz Moyer and Barron’s staff

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Lawmakers Wrestle With Debt Limit Ahead of Meeting

Treasury Secretary Janet Yellen said Sunday there were “no good options” to resolve Washington’s debt ceiling crisis other than Congress raising it in the next few weeks. Democrats are scrounging for alternatives as President Joe Biden plans to meet Tuesday with congressional leaders.

• Biden is expected to bless bipartisan spending negotiations, but still ask Congress to raise the debt limit without other conditions, The Wall Street Journal reported, citing people familiar with the plans. Brian Riedl, senior fellow at the Manhattan Institute, said the meeting would kick-start more substantive negotiations behind the scenes.

• Yellen said the U.S. must act “to avoid economic calamity.” Last week, Yellen said the government’s ability to maneuver around the $31.4 trillion limit, which it hit in January, could come to an end as early as June 1. Democrats want a bill that raises the ceiling without conditions.

• Some constitutional scholars have floated the idea of using the 14th Amendment of the Constitution as justification to continue to issue debt. A clause says the validity of public debts “shall not be questioned.” Yellen told ABC’s This Week that could spark a constitutional crisis.

• Forty-three Republican senators, including Minority Leader Mitch McConnell, signed a letter saying they won’t support raising the limit “without substantive spending and budget reforms.” Their position makes a clean debt-ceiling lift less likely, because it would need 60 votes in the 100-member chamber.

What’s Next: Biden administration officials have begun exploring a short-term extension through Sept. 30. House Minority Leader Hakeem Jeffries (D., N.Y.) told NBC’s Meet the Press he doesn’t consider that a responsible alternative, but he didn’t rule it out. “We have to avoid default. Period. Full stop,” he said.

—Liz Moyer and Janet H. Cho

***

Berkshire Hathaway’s Warren Buffett Shares Investing Strategies, Advice

Berkshire Hathaway
CEO Warren Buffett told shareholders at Saturday’s annual meeting that opportunities come from “other people doing dumb things.” In 58 years of running Berkshire, he and his lieutenant Charlie Munger have seen “a great increase in the number of people doing dumb things.”

• The meeting showcased companies Berkshire acquired over six decades, including See’s Candies, where costs jumped 30% over the past year but sales remain strong, CEO Pat Egan told Barron’s. At Brooks Sports, sales hit a record of $1.3 billion in 2022, and should grow in the high-single digits in 2023.

• On the latest bank turmoil, Buffett said bank executives and board members should face consequences if a business encounters problems after taking risks they shouldn’t have. Berkshire is cautious on the sector, holding shares of
  Bank of America,

  Citigroup,
  and
  U.S. Bancorp
  after selling stakes recently.

• Buffett said he was impressed with generative AI’s abilities to summarize legal opinions, but worries about its potential consequences, saying: “We won’t be able to uninvent it,” The Wall Street Journal reported. Munger added: “I think old-fashioned intelligence works pretty well.”

• Munger, who has previously criticized consultants and compensation specialists, took aim at the wealth management industry on Saturday, saying there are too many people pursuing careers in the business.

What’s Next: Although Berkshire is the biggest shareholder of
Occidental Petroleum
and
Chevron,
Buffett said it isn’t going to buy control of Occidental. He praised
Apple,
Berkshire’s biggest stock investment, as “a better business than any we own,” saying customers would rather give up their second car than their iPhones.

—Nicholas Jasinski and Janet H. Cho

***

These Jobs Could Be Most Affected by AI Chatbots

The explosive rise of generative artificial intelligence chatbots has people wondering what jobs will be affected as companies as diverse as International Business Machines (IBM) and the education technology firm Chegg brace for the impact to their own operations.

• IBM
  is pausing hiring in areas, such as human resources, where AI could replace human workers.
  Chegg’s
  shares were cut in half after it warned of slower growth and are down nearly 60% so far this year.

• Professors from Princeton University, the University of Pennsylvania, and New York University analyzed the occupations that may be most vulnerable and listed telemarketers, loan officers, and law clerks, but also sociologists, political scientists, arbitrators, and mental health counselors.

• Interior designers are most exposed to AI’s image generation skills, followed by architects, chemical engineers, and art directors. It doesn’t mean these professions are over, however. The researchers are agnostic as to whether generative AI complements or substitutes certain labor.

• Duolingo,
  which has been using AI since 2020 to deliver personalized language lessons for app users, has incorporated OpenAI’s GPT-4 in its newly launched subscription tier, Duolingo Max, which costs $30 a month compared with $7 for Super Duolingo.

What’s Next: In a recent survey by business service platform Tidio, 64% of respondents think chatbots, robots, or AI can replace teachers in the future. Still, many believe certain qualities, such as empathy and good listening skills, may be difficult to substitute.

—Liz Moyer and Evie Liu

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MarketWatch Wants to Hear From You

What could happen on June 1 if the U.S. debt ceiling isn’t raised?

A MarketWatch correspondent will answer this question soon. Meanwhile, send any questions you would like answered to [email protected].

***

—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner