Trump’s Quarterly Earnings Change Would Cost Investors
It may be a pro for companies, but it sounds like a con for investors.
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In the decades — yes decades — that I've been involved in the market, first in equity research, then portfolio management, every so often I've heard complaints about quarterly earnings reports.
One of the most common is that they foster “short-termism” or managing the business to meet or beat quarterly expectations. Essentially, that they foster managing for earnings and that can mean timing capital spending and R&D investments accordingly, as well as other short-term decision-making.
In 2018, JPMorgan’s JPM Jamie Dimon and Warren Buffett co-authored an opinion piece in The Wall Street Journal that argued companies hold back on spending and hiring to meet quarterly earnings forecasts.
Companies in the U.S. have been reporting quarterly earnings for more than 50 years as part of SEC requirements, but as the earnings season has gotten stretched, like what we’ve seen with the NBA and NHL, it seems that just as one earnings season winds down, the next is about to begin.
We bring this up because back in 2018, President Trump explored ending the quarterly earnings requirement with the argument that it would allow for more long-term planning. This week, in a post on Truth Social, Trump said securities regulators should stop requiring companies to issue financial reports every three months and instead switch to a six-month reporting period. Earlier this month, the Long-Term Stock Exchange (LTSE) said it would file a petition to the SEC to require companies to report earnings results semi-annually, with the option to file quarterly.
Why Quarterly Earnings Reports?
In 1970, the SEC’s rationale for shifting to quarterly earnings from semi-annual reporting was to provide investors with more data, context and perspective to gauge a company’s health. There is something to that thinking, after all, six months is a long time, and as we’ve seen before, things can change dramatically in a period of months. It’s quite possible that a shift to semi-annual reporting could increase the volatility and market reaction, good or bad, to those learnings.
While we think there is something about “short-termism” that rings true, quarterly earnings also bring a level of transparency and accountability that we may not get if companies are only required to report on a semi-annual basis. And as you have to expect by now, quarterly earnings reports and the corresponding conference calls help us connect the dots to positions we have in the Portfolio.
Where Do We Come Out?
While we admit the quarterly earnings season can be a bit harried at times, and we often wonder why so many companies opt to report after the market close on Thursdays, our stance is that more information is better than less. As folks who follow the data, new details can be confirming, but they can also signal inflection points and accelerating or decelerating demand relative to prior expectations.
We suspect there is some degree of “short-termism” caused by quarterly reporting, but rather than focus on the dollar cost to companies, perhaps the focus should be on the cost to investors if the switch is made to semi-annual reporting.
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