Stock market: Buffett’s warnings don’t stop earnings guidance soaring

REUTERS/Fred Prouser

• Berkshire Hathaway CEO Warren Buffett has long decried Wall
  Street’s habit of providing quarterly earnings guidance.
• But last year, S&P 500 companies issued forward guidance
  at the highest rate since 2008, according to a report by
  S&P Global Market Intelligence.
• Executives have made fewer forecasts this year amid more
  calls to do away with the practice. 

Warren Buffett has long said short-termism is bad for companies,
but many didn’t seem to concur last year. 

Companies on the S&P 500 issued quarterly earnings guidance
444 times in 2017, the most since 2008, according to a
report by S&P Global Market Intelligence released on
Thursday. 

Forward guidance remains a cornerstone of the quarterly ritual of
earnings reporting. Unlike their results, public companies are
not required by law to give investors hard estimates for the
future. But many companies do so anyway to give analysts and
shareholders a sense of their outlook and sometimes by popular
demand.

But Buffett, the CEO of Berkshire Hathaway, has refrained from
this practice. In fact, his company’s earnings statements are so
unorthodox that they don’t include any quotes from him or other
executives, which he reserves for his
annual letter and shareholder meeting. 

Buffett told
CNBC in 2016 that earnings guidance “can lead to a lot of
malpractice.” That’s because if companies know they are going to
miss earnings expectations, they might try to find ways to make
up for the shortfall.

Several other chief executives including JPMorgan’s Jamie Dimon,
BlackRock’s Larry Fink, and General Motors’ Mary Barra weighed in
on the topic in a 2016 open letter titled “commonsense
corporate governance principles.” They wrote, among other
things, that markets were too obsessed with quarterly earnings
forecasts, and companies should only issue guidance if it would
benefit shareholders. 

Buffett, Dimon, and nearly 200 CEO members of the Business
Roundtable narrowed in on the issue again in June. In a
Wall Street Journal op-ed, they wrote that quarterly earnings
contributed to a shift away from long-term investments. 

If the trend in 2018 is anything to go by, companies might be
coming around to this viewpoint. S&P’s data shows that
guidance in the first and second quarters fell from a year ago.
And according to a
FactSet report released on Monday, companies were issuing
third-quarter guidance at a pace below average. 

S&P Global Market
Intelligence

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