Between 1964 and 2024, Berkshire Hathaway (BRK.A -1.05%) (BRK.B -0.83%) achieved a staggering 5,502,284% gain compared to 39,054% for the S&P 500 (^GSPC 0.58%) with dividends reinvested. Compounded annually, Berkshire rose 19.9% versus 10.4% for the index, with dividends reinvested.

During those 60 years, Warren Buffett and his team built Berkshire from a small friends and family operation to a $1.1 trillion market cap at the time of this writing. That puts Berkshire in a league of its own when it comes to non-tech-focused valuations, as the only other U.S.-based companies with market caps of more than $1 trillion are Microsoft, Apple (AAPL 0.63%), Nvidia, Alphabet, Amazon, and Meta Platforms.

At Berkshire's latest annual shareholder meeting in Omaha, Nebraska, Buffett announced that he would step down as chief executive officer (but remain chairman) at year-end, passing the torch to Greg Abel. Abel runs Berkshire's non-insurance operations.

Berkshire fell 5.1% on Monday in response to the news after hitting an all-time high on May 2, as some investors question if Abel can lead Berkshire as effectively as Buffett.

Here's why Abel will have a far easier time growing Berkshire into a $2 trillion company than Buffett had building the company from scratch, and the advantages that could help Berkshire remain a compounding machine for years to come.

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The law of large numbers

Berkshire's history is a lesson in the power of compounding.

It took Berkshire 54 years to reach a half-trillion-dollar market cap (at the beginning of 2018) and less than seven years to go from a half-trillion to $1 trillion in 2024.

If Berkshire's stock price goes up 10% a year, which is roughly what the S&P 500 has averaged throughout Berkshire's history, then Berkshire would double in just over seven years. Even if Berkshire's stock price only goes up by 5% a year -- which is a pretty bleak forecast -- it would still double in just over 14 years.

Berkshire can reach a $2 trillion market cap even with mediocre gains. But the better question is whether Berkshire has what it takes to be a winning investment for long-term investors.

Three basic factors can drive Berkshire's stock price higher.

1. Savvy investments in public securities

Berkshire's stock price will naturally go up if the value of its stock holdings increases. This is what has happened over time with successful Berkshire investments such as American Express, Coca-Cola, and, more recently, Apple.

At the annual meeting on Saturday, Buffett said Tim Cook made more money for Berkshire than he ever made -- a nod to the enormous gain Berkshire booked on its Apple stake since 2016. If Berkshire deploys a significant amount of capital on another winner like Apple, it will drive Berkshire's stock price higher.

2. Growing operating earnings

The second factor is that Berkshire's operating earnings could increase from its controlled businesses, which would likely rise in value over time. Buffett has long preferred to focus on operating earnings rather than net income because operating earnings provide a better reading on how its controlled businesses are doing.

Berkshire is coming off a record year of operating earnings thanks to outperformance from its insurance businesses. Last year was an outlier for underwriting due to a large difference between premiums collected and claims paid. Already in Q1 2025, Berkshire's underwriting earnings were significantly lower than Q1 2024, a sign that the business is normalizing.

The more stable aspect of Berkshire's insurance businesses is its insurance investment income. Berkshire makes money on its float, which is the sum of premiums collected that haven't been paid in claims. The float acts as a safety net that Berkshire can tap into to cover claims. But in the meantime, it can invest the float and make a return.

Over time, the float has compounded in value at an impressive rate. As of March 31, Berkshire's float was about $173 billion -- up from $130 billion five years ago and just over double the $83.5 billion it was 10 years ago.

In the most recent quarter, Berkshire earned $2.893 billion in insurance investment income thanks to its huge float. Ten years ago, it earned just $1.087 billion in insurance investment income. The gradual growth of Berkshire's float is a straightforward way to compound operating earnings and drive Berkshire's stock price higher.

Aside from the insurance businesses, Berkshire generates significant operating earnings from its manufacturing, service, and retailing businesses and its ownership of BNSF Railroad and Berkshire Hathaway Energy (BHE). Abel has been instrumental in increasing operating earnings at BHE and has assumed increasing responsibilities over Berkshire's other controlled assets.

3. Investor optimism

Investor sentiment is the third factor that can drive Berkshire's market cap higher. This factor is more abstract than the others, but it has arguably had the biggest impact on Berkshire's stock price in recent years.

The price-to-book (P/B) ratio has historically been one of Buffett's preferred financial metrics for measuring Berkshire's intrinsic value because it focuses on Berkshire's assets. Whereas price-to-earnings is based on earnings per share, which again can vary based on Berkshire's conglomerate model.

A P/B below 1.1 or 1.2 used to be the level at which Berkshire would consistently repurchase its shares. But Berkshire's P/B has soared in recent years, and Berkshire hasn't repurchased stock since Q2 2024 -- breaking a 24 consecutive quarter streak. Berkshire's P/B ratio sits at 1.7 at the time of this writing, up from its 10-year median of 1.4. So by that metric, Berkshire's valuation is already a bit extended from historical levels.

The road past $2 trillion

Berkshire is worth buying if you believe the company can continue making sound investments in public securities, increase the operating earnings of its controlled businesses, and that the stock deserves its elevated valuation.

Berkshire has an impeccable track record of managing its controlled businesses. It has numerous advantages in insurance and does a good job earning income from its float while avoiding the pitfalls of overleverage that other insurance companies fall into.

All told, it wouldn't be the least bit surprising if Berkshire blasted above a $2 trillion market cap in the next five to 10 years under Greg Abel's leadership.