August 2, 2023

Do Earnings Matter?

It’s earnings season, which is like The Palio in Siena

What I mean is it’s a mad scramble, a horse race, a cultural event for public companies and investor-relations officers, the obsession of CNBC.  Full of intrigue.

For instance, UBER had surprise GAAP earnings for the first time since the company started in 1932 (cough, cough), and the stock is down over 7% as I write.

Photo 108198141 | Earnings © Vchalup |

Do earnings matter?

I’ve got an economic comparative.  Annualized US gross domestic income from paychecks, corporate earnings, rental income, investment income, etc., is a combined roughly $19.8 trillion, says the St Louis Federal Reserve Bank.

Over the same time, our gross domestic product, the sum of consumption, exports, business investment and government spending, is $26.8 trillion.

We’re spending more than we make. The two are supposed to match. 

Oh, and GDI is declining while GDP is rising. Every time since WWII that GDI has declined, we’ve been in recession. Except now. Say the economists.  Which should we believe?  The data, or the economists, who are even more wrong than scientists (who are wrong way more often than right but nobody cares)?

Back to earnings, corporate results this season show income down and revenues flat – so margins are shrinking.  I pointed it out last week.

Yet stocks are trading near record highs.  In fact, hoteliers HLT and MAR are at all-time highs despite generating less revenue than they did in 2019.  Even though hotel rooms cost twice what they did in 2019.

S&P 500 stocks are trading at 26 times earnings. Most stock-pickers focus on financial performance – like accelerating growth, or expanding margins and cash flows.  Growth vs Value.  Yet over 90% of all stock-pickers underperform the S&P 500.

To qualify for the index, companies must be US-based with currently at least $8 billion of market cap, 50% or more of stock in float (not owned by insiders or controlling holders), and net GAAP earnings in the most recent quarter plus positive earnings in sum over the trailing four quarters.

So you’ve got to have earnings. But you couldn’t gather from the index’s earnings criteria if a business were growing or shrinking.  So, what’s the index really about?  Size and liquidity.

The S&P 500 is 80% of market volume, 85% of market cap.  Shocking, that last bit.  Five hundred stocks are essentially all that matter.

This is why public companies need a lobbying arm, by the way.  We have a market that’s good for 500 of the 3,500 companies in it. Throw in the 1,700 microcaps with about 10 basis points of market capitalization combined, and you’ve got 4,700 companies (2,800 of which are reporting results this week) for whom the stock market doesn’t work.

Exchanges and bankers should discourage you from going public with less than $5 billion of market cap because the odds you can grow into it are less than 1%. They don’t tell you that.

We should have a market that’s good for all public companies. We don’t because the big indexes like the S&P 500, Nasdaq 100, Dow Jones Industrials – the trifecta for some companies like HON – are about size and liquidity.

And if you’re in those, you needn’t bother trying to court the 2-5% of stock-pickers in the large cap category who beat the benchmark. It’s not worth the time or effort. You’re already in front of all the money. Help your c-suite focus on using shareholder capital to create more Product, not more Story.

If we’re not going to band together as a constituency and create a market that works for small caps, we should at least grasp reality.  We need to know what matters.

It’s no different than, say, shoes, another product market like the stock market.  People want comfortable shoes for different purposes.  Shoe sellers tout comfort for running, hiking, walking, etc. Hokas and On Clouds are killing it.  I like my Salomon hikers.

Shoe sellers don’t tell shoe buyers about their margins.  They tell shoe buyers about comfort, durability, and other characteristics that shoe buyers want.

Why aren’t public companies doing that?

There may not in human history be so great a divide between the purpose of a market and the communication coming out of it than the US stock market.

Quast, I don’t get what you’re saying. Companies should stop talking about earnings and instead talk about…comfort? 


But the first lesson, the beginning point for any marketing plan, is understanding who buys what you sell. What’s the total addressable market?  What factors drive it? Who’s winning in it?

Can you answer those basic questions about the stock market, public companies?  If you think money buys your earnings or your dividends, let’s find out! The data will tell you.

That’s the starting point to effective use of shareholder capital.

Sooner or later, your c-suite is going to figure out that more than 50% of your shares are motivated by your size or liquidity.  It’s better to be ahead of that curve with a plan for what to do next time you report earnings to a market that sees stocks as products, not stories.

We can help.

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