Missing the Mark

One of the biggest surprises of the current quarter—that earning results are beating analyst estimates—would normally be great news for companies. Instead, it may be cause for concern for leaders, investors, and the broader stock market. 

So far, about two-thirds of S&P 500 companies have reported fourth-quarter 2023 earnings, and a whopping 83% of those companies have beaten analysts’ estimates. That’s the highest percentage in two years, and about 10% more than the average per quarter before the pandemic. The strong performance is one of the catalysts propelling stocks to an all-time high. But experts say it may put corporate leaders under pressure to overperform, as well as to rethink the guidance—or lack thereof—they provide Wall Street.

To be sure, analysts are in a tough spot.

Jason Waterman, senior client partner in the Global Financial Officers practice at Korn Ferry, says that providing estimates, even with the most sophisticated models, has become more difficult due to intangible factors like geopolitical instability, recession predictions, and lack of visibility into organizations. “The narrative in the market right now is one of uncertainty, and that is causing companies and analysts to be conservative,” says Waterman. He observes that the cautious approach of leaders and analysts belies the strong performance posted by businesses. “It’s almost like no one trusts what we are seeing,” he says.

To derive their estimates, analysts rely on various factors, among them an organization’s historic financial performance, management comments, and industry and market trends. But uncertainty—over inflation, interest rates, upcoming global elections, and more—has complicated the current macroeconomic outlook. Case in point: During the fourth quarter, analysts revised earnings more frequently and by a wider margin than normal, according to FactSet data. Overall, companies are reporting earnings nearly 4% above analysts’ estimates, according to FactSet, with some sectors like energy and consumer discretionary coming in at 13% or more above expectations.

The lack of company-issued financial guidance is another reason for the disconnect between estimates and earnings. Companies stopped issuing guidance in the aftermath of the pandemic, and most have yet to resume doing so. Only about 25% of S&P 500 companies provide quarterly guidance; just over half provide it annually. Making matters worse, studies show that even when companies did provide guidance, it was inaccurate a majority of the time. Waterman says the optics of inaccurate guidance is part of the reason companies are reluctant to reinstate it—and cause for concern. “It’s a two-way lose for them,” he says. “If they undershoot guidance, it looks like they planned poorly. If they overshoot guidance, it looks like they’ve set the bar too low.”

In the absence of guidance, analysts must parse leaders’ language, says Peter McDermott, senior client partner in the Global Corporate Affairs and Investor Relations practice at Korn Ferry. McDermott suggests that upside-earnings surprises this quarter could be a function of leaders “underpromising and overdelivering.” To be sure, dour comments over the last few months about weakening demand, slowing topline growth, and an uncertain outlook, for instance, send one message to analysts. At the same time, companies have moved aggressively to grow profit margins by cutting costs, laying off workers, and consolidating operations. “All these signals impact the equity story, because analysts interpret and adjust models based on them,” says McDermott.

Analysts at many financial institutions are also spread too thin, say experts, assigned to cover a dozen or more stocks simultaneously. That makes managing the investor-relations message by marrying it with communications more important than ever, says Richard Marshall, global managing director of the Corporate Affairs and Investor Relations Center of Expertise at Korn Ferry. Investors typically reward earnings beats by investing in the stock, sending its price higher. That dynamic could end up harming organizations and investors over the long run by creating an artificial bubble. “Avoiding wild swings in stock prices comes down to setting the right expectations,” says Marshall. 

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