‘We’re Doing Better Than Expected’

Earnings were down in Q2, but nearly eight in ten firms beat analyst expectations. Are firms back to their pre-pandemic ways of lowballing forecasts? 

If they can’t tell Wall Street that profits have grown, company leaders this summer have been determined to at least tell investors that things are going better than expected. 

Nearly all of the country’s largest 500 publicly traded companies have reported their results for 2023’s second quarter. Year over year, earnings are down about 5%, as a combination of a slowing economy and higher interest rates have made it tougher for many organizations to generate higher profits. But there wasn’t much glumness on Wall Street—because almost eight in ten firms exceeded analysts’ expectations. 

The pattern isn’t exactly new. Pre-pandemic, firms frequently gave forecasts that came in below the results, effectively setting up Wall Street to applaud—instead of frown upon—even low earnings. Experts say this practice can help keep stock prices up and antsy stakeholders away. But during the pandemic, most firms stopped forecasting altogether, due to the unprecedented conditions. Now it’s apparently back to the old patterns of lowballing, if not more so. 

Companies have gotten very conservative about their earnings guidance, says Richard Marshall, Korn Ferry’s global managing director of the firm’s Corporate Affairs and Investor Relations Center of Expertise. “They’ve wanted to underpromise and overdeliver, instead of the other way around,” he says. “It’s almost like we went back to the old model.”

As part of earnings management, companies routinely push back or accelerate the including of certain revenues or costs in a particular quarter. Indeed, corporate leaders often shift earnings from uncertain times—be they due to company-specific or broad economic issues—to more certain ones, according to a 2016 study from researchers at Harvard and Arizona State universities. 

Then there’s the whole business of explaining corporate strategy. Big firms have entire investor-relations divisions managing the expectations of both big investors and Wall Street analysts. In 2017, 28% of S&P 500 firms provided official quarterly guidance, according to market research firm FCLTGlobal. 

During the pandemic, company executives said that COVID-19 was disrupting the economy to such a degree that they couldn’t advise investors on revenues or profits for the foreseeable future. Many of these executives had complained for years that forecasting and posting quarterly forced them to focus only on the short term. “There was definitely a pattern of moving away from quarterly guidance, to focus on long-term investments rather than quarter-to-quarter forecasting,” says Peter McDermott, a senior client partner in Korn Ferry’s Global Corporate Affairs and Investor Relations practice.


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