As stocks surged back from the late March bottom, one piece of market information normally used by traders to assess opportunity in public companies has been nonexistent: short-term financial guidance. The whisper numbers on Wall Street that investors trade around quarter to quarter, and which depend on company executives setting the bar, were a casualty of the coronavirus economic uncertainty. Some think guidance is gone for good.
As the second-quarter earnings season kicks into high gear, about half of the S&P 500 companies have so far declined to provide any guidance. IBM CEO Arvind Krishna said after its earnings on Monday, "In April when we said that we will reevaluate in 90 days, maybe we were a little bit optimistic. ... Uncertainty in the economy makes us unwilling to provide guidance."
Part of the reluctance to renew quarterly guidance is rooted in the unprecedented nature of the Covid-19 public health crisis and economic fallout. But the Wall Street short-term numbers game favored by the sell side of big banks and brokerage houses, and hedge fund clients, was the subject of criticism for years before the crisis. Some chief executives already have said guidance is never coming back, such as IAC's Barry Diller.
The number of companies suspending guidance is "way beyond anything seen in the worst moments of the global financial crisis," according to a blog post from two of Alliance Bernstein's top U.S. stock portfolio managers. In all, over 850 companies suspended annual guidance during the pandemic. Now advocates for a more long-term approach to investing, including the AllianceBernstein team, say it is time to think about investing in a post-guidance world.
"We believe that it's more appropriate to ground evaluation scenarios by assessing a company's profit potential over the next 10 years," the AllianceBernstein team wrote.
"The fact that all those companies pulled those numbers, and market still recovered, is telling. Maybe we don't need this information," said Ariel Fromer Babcock, managing director and head of research at investing advocacy group FCLTGlobal, which is among the most vocal critics of short-term guidance. "We hear about companies apologizing when they pull guidance, but many investors say, 'Don't apologize. Don't bring it back."
With no numbers to trade, some suspect the strength of the market rally has been led not by the day traders associated with free trading apps like Robinhood but institutional investors having more control over price-setting in the market as the short-term game played by high-frequency quant firms, hedge funds and day traders is crippled. Extreme volatility can take out the short-term players, not only in cases where the firms are in financial distress due to margin calls but simply because there are no numbers to trade.
"What we are seeing right now is a long-term investor perspective on value, and what we see in more regular times is fluctuations driven by shorter-term investors," Babcock said. Of the more than 850 companies to pull guidance during Covid-19, she added, "We would expect a significant portion of the companies pulling guidance to never look back."
Earnings guidance does not have a very long history relative to the history of the markets — by law it did not exist prior to changes made by the Securities and Exchange Commission in 1973. And its heyday may have long since passed already. The National Investors Relations Institute found in a study that as far back as 2007, the number of companies giving quarterly guidance was plateauing. Following the 2008 financial crisis, an increasing number of companies started communicating on longer-term strategic plans and earnings per share guidance was trending down: an NIRI study found that 60% of companies in 2009 gave quarterly EPS guidance, versus 77% pre-crisis in 2007.
"We've seen companies steadily move away from periods less than one year," Babcock said. "We've thought a lot about this idea 'Never let crisis go to waste,' and in survey after survey, investors tell us they want a three-year minimum horizon for forward targets. Some conceded annual guidance was nice, but the three-year mark was most important ... 70% to 90% percent of value is related to cash flow three years or more into the future, so if you're not given perspective on what that looks like, it causes a huge disconnect."
More than half of corporate executives (55%) would rather delay a net-positive-value project than miss quarterly earnings targets by a penny, according to a 2016 survey from FCLTGlobal. Yet just 9% of global buy-side investors believe that earnings guidance on a less-than-annual basis is important.
"Quarterly guidance was going out of favor even before Covid-19, and we certainly hope the pandemic will accelerate that trend," said Amy Borrus, the executive director of the Council of Institutional Investors. "Even annual earnings guidance can lead executives to do too much in the short term to make sure it is fulfilled, and for many it's a waste of time."
J.P. Morgan CEO Jamie Dimon and Berkshire Hathaway CEO Warren Buffett are among CEOs who called for the elimination of quarterly guidance well before the pandemic (Berkshire has never issued guidance).
A recent CNBC survey of CFOs on its Global CFO Council suggests that a significant percentage of companies may permanently move away from guidance issuance. A little less than half of companies (43%) said they expect a resumption of full-year guidance. Ten percent of companies think guidance is not coming back, while another 10% said they weren't sure if full-year guidance will resume. About one-third (36%) of CFOs said "some companies will bring back guidance and some won't."
"The longer you get used to not doing something, the easier it becomes to not do it," Borrus said.
She said guidance on management thinking about how to rebuild after Covid-19, what needs to be addressed most urgently, is much more important than guidance on earnings.
"Executives need to provide insight now on how they are thinking about the crisis and capacity planning and adjusting to it," Borrus said. "Institutional investors want management to provide clarity and insight on how they get back and move on and rebuild the company."
A spokesman for the Washington State Investment Board, which manages over $100 billion, said in an email, "We certainly agree in general and ideologically on the importance of emphasizing long-term strategic growth versus the fleeting signals of short-term guidance."
Many of the largest public companies already offer three-year targets for at least some financial metrics, according to a database maintained by FCLTGlobal, and the list of 206 corporations includes some of the biggest in the U.S., including Walmart, McDonalds, Starbucks, Salesforce.com, Ford, Home Depot and Nike.
There are significant forces in the market that disagree, and the battle has been waged in public testimony and comment letters to policymakers for years. Hedge fund advocacy group Managed Funds Association wrote in a late 2019 comment letter to the SEC about proposed elimination of quarterly reporting, not just guidance, "Private fund managers believe that the existing quarterly reporting framework under the Exchange Act has worked well. Managers rely on quarterly information to evaluate companies in which they have invested or are considering investing, and use the information to determine the progress that companies have made to achieve their objectives. A reduction in the frequency of reporting from quarterly to semi-annually would reduce the timeliness and usefulness of the information, which would make it more difficult for managers to analyze the performance of, and invest capital in, public companies."
The MFA did not respond to requests for additional comment.
The argument assuming the importance of quarterly numbers, however, does not look as convincing in the current, guidanceless, bull market recovery.
"Stocks of companies that you thought would have been creamed had nice recovery and have longer-term shareholders," Babcock said. "A number of companies are waking up to the reality of strategic communication being of utmost importance in times of crisis, the investments they are making to make the companies more resilient in the face of disruption and laying the foundation for growth. All those conversations are much better informed by a longer-term perspective and outlook."
Wall Street analysts remain dubious about any long-term shift in guidance caused by the coronavirus.
"The current period during pandemic has been a free pass to companies to not give guidance, because they are playing blindfolded darts, and the Street has accepted it, but on other side of this dark valley and in a new normalized state, I think there will be lots of issues from the institutional investor perspective if management teams decide to keep the trend of not giving guidance," said Dan Ives, managing director and tech stock analyst at Wedbush Securities. "If companies try to use the current state to not issue guidance 12 to 18 months down the road, I don't think it would fly with many top shareholders."
Ives said there may be a price to pay for management teams that permanently remove guidance, even if it is not being felt today as stocks reapproach records.
"If there's 40 to 50 companies in a given sector or subsector, and 90% are giving quarterly or yearly guidance but then one management team doesn't, investors will need a really good reason why. ... I think companies that don't give guidance could trade at discount — valuations discounted by the Street given lack of transparency," Ives said. "It would put companies in the penalty box."
He said the relative value of shorter-term guidance does depend on the specifics of a sector, but to not give guidance going forward is going to be a hard case to make across all parts of the market. "You're talking about a once-in-a-century uncertainty. It is going to continue for six months and beyond. Investors understand there are more quarters of uncertainty to come, but I think it will be tough to convince analysts and institutional investors that the new norm is not giving guidance. Guidance is important in the near term and long term."
Whereas the long-term shareholder advocates see management credibility being tied to a longer-term view more than ever before, Ives says credibility of management teams is also built on their ability to forecast and meet or exceed guidance. ... As someone who has covered tech for two decades plus and talked to thousands of investors around the world, I can count on both hands the investors that don't care about guidance," Ives said. "You want companies to always manage to the long term, but if they can't call the next three months, how can you have confidence in the next three years?"
He added, "The concept of guidance is meaningless right now, given the pandemic backdrop, but investors will go back to traditional metrics and guidance."