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Fake news?

 

Apple was the big winner of the summer results season. The US tech giant became the first company ever to record a trillion-dollar market cap, twice the GDP of Belgium. A fitting symbol for what has been a lively season on the markets, rife with sometimes sharp stock price movements as results surprised on the upside (Autodesk +15%, Illumina +12%) or downside (Facebook -19%, RWS -25%).

Quarterly reporting of US companies’ results – mandatory within 45 days of each quarter-end – sets the calendar for financial markets. Easily led by their American  big brother, global markets tend to fluctuate as one, although this rule has its exceptions. French lawmakers got rid of the quarterly-reporting obligation for French companies in 2015.

Nobody can deny the benefits of rich information which is widely accessible and available at short regular intervals. However, the agitation that accompanies every reporting season can be worrying for the unwary market watcher. Very short-term market reactions triggered by earnings releases have more to do with a game of chance than in-depth financial analysis. Cynics might be tempted to compare the stock market to Russian roulette or a hand of poker.

Even Donald Trump this summer invited the US regulator to think about eliminating the obligation to publish quarterly results. The US President’s love of short-form tweets may however suggest he was also a fan of Beat and Raise, the concise formula that hails the results of the best performers each season and increasingly sums up the verdict of the markets.

Are three months enough to identify, analyse and dissect a company’s economic and financial situation? Obviously not.

These market ticks could inspire a passive response. Instinctively (or stoically?), professionals end up limiting their assessment to this brief three-word summary. And some company managements may be tempted to keep their eyes glued to the next three months and take steps to sustain their share price through the market’s gymnastics.

But (at the same time?), the tyranny of quarterly results publications has never stopped good companies developing. Amazon, Netflix and even Tesla have been able to take short-term profits and invest in long-term profitability.

Quarterly results also help investors check and analyse the ability of management teams to think long term and so sustain their confidence.

Half-yearly? Quarterly? The debate opened up by the US president highlights the importance of financial research… Only in-depth analysis can spot the visionary managers, who lead their companies with a strategic vision rolled out over the long term, and to steer clear of opportunists. Because, even if markets don’t like reality, reality will always win out in the end.

 

Didier Le Menestrel