The SEC’s Proposed Semi-Annual Reports Could Hide Negative Earnings

Negative quarterly earnings could start going the way of a certain 2025 heist movie starring Jesse Eisenberg: Now you see me, now you don’t. 

With the SEC’s proposed change to allow companies to report earnings semi-annually rather than quarterly, negative quarterly performance is more likely to get swept under the rug in positive half-year reports. For example, bad quarters where revenue declined by at least 5% would be masked by positive semi-annual reports at twice the rate as good quarters, according to a Bloomberg analysis of S&P 1500 companies’ earnings going back to 2010. With less information about company performance in addition to a possible move toward 24-hour trading, some advisors are gearing up for more market turbulence. 

“That would obviously create more volatility with more concerns on transparency and inability to really understand the health of the company,” said Christine Sol, an investment strategist at Signature Estate & Investment Advisors, adding that less company data combined with more trading hours is “quite a disconnect.”  

Farsighted or Far-Fetched?

Proponents say semi-annual reporting would ease companies’ bureaucratic burden and let them focus on long-term goals over seasonal performance. On the other hand, critics counter that along with reducing transparency and increasing volatility, it would leave  retail investors, who lack the proprietary data available to institutional investors, at a disadvantage. And while volatility is an opportunity for experienced investors to buy low and sell high, it “plays with the strings of the retail investor,” said Gabriel Shahin, founder of Falcon Wealth Planning. “When things are good, it makes them feel invincible … When it’s bad, it’s going to get really bad because retail is going to continue to sell.” 

The proposed rule change is drawing wide attention: 

• The SEC reportedly collected about 200,000 comments on the plan, the largest public comment docket by volume for an official proposal from the agency. 
• The vast majority (we’re talking 99.5%) of those comments were negative, according to research by Tzachi Zach, an accounting professor at the Ohio State University. 

Crude Awakening. This blurring effect was especially pronounced in the energy sector during the pandemic, when oil prices were highly volatile. Bloomberg’s analysis found that among current Russell 1000 Energy Index companies, more than half had at least one quarterly revenue move between 2020 and 2021 that would have been masked by semiannual results. This phenomenon could also be prevalent in consumer discretionary goods, which are prone to dramatic seasonal shifts, Sol said. “If we have semiannual reporting, all that is jumbled together. We’re supposed to paint a picture ourselves about what happened over those six months, and it doesn’t really give a clear confidence of where the consumer is going.”