Trading strategist unpacks potential winners and losers, notes that this might be more likely to occur than people think
The statement by President Donald Trump in mid-September that he wants to see an end to quarterly earnings reports by public companies, preferring a semi-annual reporting schedule, was initially greeted with incredulity on financial media and among market participants. The quarterly earnings report has been a standby of the US equity market, a cadence of information flow that advisors and investors could literally set their watches by. Despite that initial reaction, Geoff Phipps explains that this new reporting schedule could very likely become reality soon.
Phipps is a Trading Strategist and Portfolio Manager at PICTON Investments. He noted the political realities of a Securities and Exchange Commission (SEC) chaired by a Trump loyalist and with a Republican majority. He explained what that change in reporting might mean for the flow of information to investors, how that could impact volatility, and what advisors can do to prepare for this possible change.
“I think many assume now that if we do move to semi-annual reporting, that you will still have companies providing some information on a quarterly basis as well, but you'd have a varying degree of usefulness to that,” Phipps says. “There are different participants at play here. There's the broader investment community, there's the buy side, there's the sell side, there's the corporate C-suite, and then there's the public and the regulators, I think they all have slightly different potential impacts.”
The first area of the industry likely to be impacted, Phipps says, are the US hedge funds that make their margin by trying to front run guidance based on their own independent research methods. That operating style, which Phipps characterizes as “incredibly short-term,” may be changed by the lack of a quarterly event that makes or breaks a hedge fund’s prediction. That could, he notes, help dampen the volatility around those quarterly earnings, but that volatility may be further concentrated around the two points in the year when companies would be reporting earnings.
Because corporate credit bond covenants are also tied to earnings releases, Phipps notes that credit markets might prove more challenging to navigate with fewer periods of transparency.
The possible shift in reporting timelines may prove a relief to C-Suite executive teams. As earnings reporting has become more intensive over the past decades, Phipps notes that there has been a significant burden placed on management teams to deliver these numbers on time. Less frequent reporting could help alleviate some of that process burden.
More speculative sides of the market may benefit from fewer earnings reports as well, Phipps notes. He explains that companies trading like meme stocks, with little underlying data to back their exploding valuations, might run hotter for longer without the earnings report to function as a reality check for investors. Moreover, less earnings reports may leave more space for promotional press releases and incomplete voluntary reporting that makes a company look to be in better health than it is.
Growth companies with a greater focus on R&D may also benefit in a less frequent reporting environment, Phipps notes. That doesn’t just have to be zero revenue companies, but software companies with high R&D budgets may have more time to see their investments in technology deliver returns between reporting events. Even in the energy sector, exploration and production companies could see a windfall from a slightly less short-term view taken by investors.
Phipps believes that should a semi-annual reporting schedule be adopted, we are not likely to hear total silence between those reports. As with Europe, where companies report semi-annually, there may be more information released via conferences, fireside chats, and targeted data releases to give investors some direction. Should this proposed schedule be adopted, which Phipps believes is more likely than we might expect at first blush, then the outcome might not be as cataclysmic as such a fundamental change might appear.
“I think the transition is going to require an adjustment from the industry. But it's not hard to believe that if it were to happen, and we fast forward two or three years, we look at and say, this isn't this is the worst thing in the world,” Phipps says. “The transition is going to be uncomfortable for many, I think, if it were to happen, but that adjustment would probably only take about a year for processes to catch up.”
