With a few clicks on his keyboard and one social-media post to the world, President Donald Trump revived a long-running debate on the merits of quarterly earnings reports. The resolution could have significant ramifications for investors. The Securities and Exchange Commission is listening to the president. After Trump’s missive on Truth Social on Monday morning — arguing the SEC should do away with its quarterly earnings requirement in favor of semiannual reports — the U.S. securities regulator said in a statement it is “prioritizing this proposal to further eliminate unnecessary regulatory burdens on companies.” Trump’s idea is not a new one. In fact, semiannual reporting requirements are the standard in Europe, and they also were in the United States between 1955 and 1970. Then, the SEC switched over to the quarterly requirements we have today. Debate over earnings disclosure standards — and whether they create problematic short-term thinking — came to the fore in 2018 during Trump’s first stint in the White House. In June of that year, Warren Buffett, arguably the most famous long-term investor in history, and JPMorgan’s influential CEO, Jamie Dimon, co-authored an op-ed in The Wall Street Journal that decried the practice of companies issuing quarterly earnings guidance. Then in August, Trump took it a step further and advocated for twice-a-year reporting altogether. Trump’s push didn’t gain traction that time around. But now it’s back. Will it happen? In a note to clients Tuesday, strategists at Wolfe Research put the odds at greater than 50%, though they cautioned it won’t happen overnight based on the SEC’s standard protocol for changing rules. “The process for implementing this change should stretch into [the second half of 2026] if not beyond, and there’s a chance it fizzles out based on pushback in the notice-and-comment rulemaking process,” Wolfe Research wrote. Another important question for investors: Would a move back to the semiannual reporting structure be beneficial? As with most things investing, it depends. In favor of the status quo On one hand, the quarterly reports we get today allow for more transparency and contact with the leadership teams steering companies. Not only do we get official numbers every three months and backward-looking discussion on what contributed to that performance, we also get commentary from management one to two months into the current quarter. And even for companies that don’t provide formal guidance, we still often get executives’ high-level expectations for the months ahead. This is arguably more beneficial to the home-gamers that may lack access to pricey research from Wall Street brokerages, don’t have a direct line to investor relations teams, and don’t have millions to allocate to alternative research methods beyond sell-side reports — like paying for conversations with industry experts or satellite images that track how many cars are in a retailer’s parking lot on any given day, and so on. Sure, the big money also benefits from official financial statement filings because this helps with their modeling efforts. However, these deep-pocketed investors — think like hedge funds and asset management firms — would still be able to garner a ton of information even without the quarterly filings thanks to analyst channel checks, industry conferences, management discussions, and access to the resources noted above. Yes, home-gamers have access to the audio of many industry conferences and can get access to some analyst notes. But it’s ridiculous to pretend as if the access to public company management teams is the same for both cohorts. In effect, the positive of quarterly reports comes down to transparency. When Jim Cramer preaches buy-and-homework investing, a big part of that is paying close attention to earnings season — and not just when your own portfolio companies report. Earnings from industry peers offer “read-throughs” that can provide insights as well. So, supporters of the status quo believe that getting this opportunity four times a year is more optimal to a less-frequent alternative. In favor of semiannual On the other hand, proponents see benefits to less frequent reporting. For starters, they argue that preparing for quarterly reports is costly. Trump specifically mentioned in his Truth Social post that reporting every six months “will save money.” Others believe the current short-term focus of the market deters companies from wanting to be publicly traded in the first place. “President Trump realizes that whether it’s the U.K., [or] it is the U.S., our public markets are atrophying, and this might be one way to bring back and cut costs for public companies without harming investors,” Treasury Secretary Scott Bessent told CNBC on Tuesday . More generally, an investor should want a management team focused on the multiyear health of the company — one that invests in sustainable, longer-term growth, even if it means a slight hit to nearer-term profits. That’s a bit more difficult to do when you have to report every three months and the market is expecting a certain set of results. Extending the reporting period out to six-month increments allows management teams more breathing room to plan and execute effectively, which, in theory, should lead to better results over the long-term. The best management teams, of course, already do this. However, many don’t have that luxury. For example, investors have come to understand that Amazon couldn’t care less what the market thinks about their quarter-to-quarter spending habits. Amazon can largely get away with that because of how massive and successful it has become, and investors have become convinced of the secular nature of its business. More cyclical companies, however, do not have this luxury and are far more prone to volatility should they fail to manage to the market’s expectations. Retailers such as TJX Companies or a restaurant chain like Texas Roadhouse tend to have investors hyperfocused not only same-store sales in the quarter, but the cadence month-to-month as well. Investors then try to look out and extrapolate what the next few months might look like based on that cadence. Sure, management teams can do their best to focus on the long-term, but the reality is that investors will expect you to meet or exceed analyst expectations when you report results. And if the reports come every three months, then management teams need to at least consider near-term expectations if they are to keep shareholders happy. Failing to do so will result in extreme price swings that may cause shareholders to rule the company out all together, preferring not to ride that roller coaster of emotion. By removing the quarterly standard in favor of a semiannual one, proponents believe investors will get a management team that is more long-term focused. Whenever posed with a scenario like this, I think back to something my Economics 101 professor said during my freshman year of college. He argued that when debating the merits of an incremental move one way or another, it can be beneficial to think in terms of extremes. In this case, one extreme might be to argue for monthly reporting, while the other would be to argue for once-a-year reporting. Would we really want a management team to worry about reporting profits every single month? Sure, Costco reports monthly sales numbers but it’s not a full financial breakdown of the month. Conversely, would it be preferable to get an official annual update? Confronted with these two hypotheticals, which way you lean probably depends on your approach to the market. A trader or professional money manager who has to answer to investors constantly would likely lean toward more frequent reports. A long-term investor, however, may prefer less frequent reports on the belief that investing in a company means you’ve essentially hired that management team. The last thing you want to do when it comes to strong operators is “micromanage” them and have them so worried about what they’ll tell you next month that they lose track of the bigger picture — which, in this case, would be the full-year results. Of course, it could be that the best solution is somewhere in the middle, with management teams providing constant updates but refraining from providing quantifiable guidance. As mentioned, Buffett has directed his criticism of short-termism in markets on the guidance piece of the equation. “I like to read quarterly reports as an investor,” Buffett told CNBC in an interview in August 2018 , a few months after his op-ed. He added, “I like to get those quarterly reports. I do not like guidance. I think the guidance leads to a lot of bad things, and I’ve seen it lead to a lot of bad things.” Where does the Club stand? We see the merits to both sides. As Jim put it Monday, if he was a CEO, he would want to report less frequently. But, as an investor and markets commentator, the current system provides a lot to like too. We preach long-term investing at the Club, and as such, we do appreciate policies that allow management teams to focus on the long-term, which favors a move to semiannual reporting. On the other hand, we understand the importance of keeping management accountable, and, in general, view transparency as a good thing. We cannot predict what, exactly, would happen if the SEC scrapped the quarterly reporting mandate, but a range of outcomes are possible. For example, there are those who argue that semiannual earnings reports may put increased pressure on management to provide smaller, more frequent updates to keep investors up to date. After all, many European companies issue quarterly updates despite being only legally required to file on a semiannual basis. Similarly, a move to semiannual reporting can be “policed” by shareholders via free market dynamics. Should companies take this to mean they don’t have to provide regular updates anymore, investors can simply sell the stock —a vote, so to speak, that companies must still update shareholders regularly even if the SEC doesn’t require quarterly filings. One reason why executive compensation has become heavily tied to stock is to align the incentives between managers and shareholders. As the case of investors punishing Meta Platforms for its aggressive spending a few years ago showed, eventually the company got religion and CEO Mark Zuckerberg embraced the “year of efficiency,” with remarkably positive effects on its stock price. It’s not exactly apples-to-apples, but the point is the market’s reaction influenced management’s decision-making. Not providing any updates outside of the six-month filings would also mean that the stakes for each report are that much higher. That’s because investors will need to price in six months worth of information at once rather than the three months they do now. Those that do provide regular updates, even without providing full breakdown of financials in accordance with GAAP accounting standards, may in turn be rewarded with higher valuation multiples because investors have a higher degree of confidence in their estimates. At a high level, management teams work for their shareholders, putting aside some of the founder-led firms where those founders maintain majority voting rights. Even still, Wolfe Research argues that if one company in a sector is facing investor pressure to keep reporting, “other companies in their sectors will face pressure to also stay quarterly.” In the end, we would bet that free market dynamics result in this change not being as big a deal as it may seem. The SEC may dictate the legal filing standards. However, the shareholders will likely dictate the disclosure practices. (Jim Cramer’s Charitable Trust has positions in TJX, AMZN, META and TXRH. See here for a full list of the stocks in the Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
www.cnbc.com
#Trump #pushes #companies #report #earnings #frequently #sides #debate
