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- [00:00]
A
Today's episode is sponsored by Trading 212, the platform bringing commission free investing to everyone. Corporate America has just delivered its best earnings season in years. Record beats, record margins and growth numbers that look almost too good to be true, which is convenient because some of them are. Meanwhile, Europe is also delivering the goods.
- [00:27]
B
I want to know what's really driving the blowout quarter on both sides of the Atlantic. And in today's dumb question of the week, why do companies report every three months anyway? All right, let's get into it. So sometimes I look at a document and the first thing I think is I need to talk to Roman about this. And I saw one such document this week, which was the FactSet Earnings Insight, which aggregates up all the profits for the s and P500 and how each company is doing. And the companies are doing extraordinarily well this quarter. If you look at just the top line earnings growth figure, it's over 50% at the moment and that's with almost 90% of the index having reported. So many times we've talked about the state of the stock market and whether it is or isn't in a bubble in the US because of the price people are willing to pay for AI companies. And we've usually said the only thing that would stop this being a bubble is if earnings growth really accelerated and the companies grew into the valuations. Is that happening, Ramin?
- [01:36]
A
It's certainly happening at the moment and that's brilliant news because what it means is we're not going to have a rapid re rating downwards at least unless there's a shock which would trigger that. So that's the best possible outcome, a kind of smooth, almost like a soft landing, but applied to earnings rather than monetary policy. Now earnings is a funny game. When I used to work in investment banking, the equity analysts, they'd always come up with a forecast earnings for every stock they covered and then it would be affected by what the companies themselves were saying. So there was a little bit of a weird reverse psychology game here where the companies would guide very cautiously and then surprise, surprise, they'd beat that forecast. And yet this season seems to have really been a blowout in terms of earnings growth and surprises. The aggregates of Prize is almost 30%, it's 29.2 and that's the largest since FactSet began tracking it in 2008. And can I just say thank you, John Butters, for making that report. I've been reading it for so many years now. He's a very much Unsung Hero from FactSet.
- [02:49]
B
But the one thing John Butters report makes clear is that this set of earnings is a little bit slippery. Oh, just merry myself in that a huge amount of the earnings growth is coming from just two companies and it's coming about in quite an unusual way.
- [03:10]
A
So what he says is that if you strip out Alphabet, Google and Amazon, earnings growth falls to 32% from 50% and the surprise falls to 11%. So a huge difference based on just two stocks.
- [03:29]
B
So what's going on there? We've got Google and we've got Amazon posting absolutely enormous beats. So Amazon, for example, reported $5.75 in earnings per share when it was expected to report less than $2. Alphabet's a kind of similar story. And for both of these companies, what has made the difference is that they've had a huge investment windfall on their private stakes in Anthropic and also in Alphabet's case, in its holding of SpaceX shares. As those stakes have rapidly risen in value, it flows directly through Internet income. And that's just because GAAP accountancy rules work on a mark to market basis. So to be clear, Alphabet and Amazon are not fiddling the books in any way. They're reporting exactly what they need to report, but it's got nothing to do with their underlying business.
- [04:23]
A
And that's one of the things you soon come to terms with if you read these company reports quite a bit, which is that there can be these huge distortions if you just look at one earnings report. But let's just think about what that valuation for Anthropic means. We've got a company which has scaled hugely and which potentially could become very profitable, which has gone from zero valuation to billions over the space of a very short period of time, almost a trillion.
- [04:52]
B
So IT rose from 380 billion to $960 billion in valuation at its latest capital raise.
- [05:00]
A
And this is all based on hope, the hope that this is going to be a hugely cash generating company, it's going to dominate the market for AI. It's not going to be undercut by cheaper competitors from the US or elsewhere China. So that's a lot of optimism priced into that valuation, which is also affecting the reporting of all of these companies which have invested in Anthropic.
- [05:26]
B
Yeah, it's that kind of circularity which makes this thing almost absurd. So you've got Anthropic trying to raise capital and it gets a large part of that capital from the hyperscalers like Amazon, like Alphabet, and they give loads of money to Anthropic in exchange for equity, which boosts the value of Anthropic, which then directly goes into higher profits immediately at Alphabet and at Amazon. And it has a meaningful impact even at the index level.
- [05:58]
A
Now, the problem with this GAAP accounting rule is that it cuts both ways. We saw a huge boost for this quarter, but we could also see a huge collapse for Next. And that's a problem if we do get some kind of failure to fulfil this promise.
- [06:16]
B
But you say it's a big problem. Let's pause on that for a second. Is it really a big problem? Because the market can see exactly what's happening here. It can calculate operating profits and ignore the fluctuation in the values of these private stakes. And despite the fact that Alphabet reported unexpectedly high earnings on a GAAP basis, it was punished by the market. Its share price fell after reported earnings.
- [06:43]
A
Now, fortunately, I've been recording quarterly earnings for the us, Europe and also the uk, and I've been doing it on a weekly basis, taking a snapshot from thousands of stocks, including Alphabet and Amazon. And something absolutely remarkable has happened, quite shocking because earnings growth is measured on a year to year basis. What's happened is we've had a huge boost for this year's quarterly earnings, but next year's hasn't been affected much, presumably because analysts don't think it's going to carry forward to that period of time.
- [07:18]
B
So you're talking about the forecast earnings here for 2027?
- [07:22]
A
Yeah. So, for example, for Amazon, it's at around $10 for next year, whereas this year shot up from about $8.70 to about $12. So year on year we flip from positive growth to negative. What's remarkable is the speed with which that's happened from positive earnings growth to negative because of a great quarter, which is this gap accounting rule, essentially.
- [07:48]
B
But then again, that could all change because these marks are going to be tested, aren't they? Anthropic has confidentially filed to list potentially as early as October this year if it has an IPO and then does what SpaceX did and soars and maybe doesn't crash quite as quickly as SpaceX has done then on these Gap rules. Amazon's stake in Anthropic, for example, would flatter its earnings for the quarters to come.
- [08:16]
A
Well, that's a lot of ifs. I think what usually happens with an IPO is there's too much optimism baked into it and it usually falls after the IPO happens. I did an explainer about this to the community. And that seems to be a very strong pattern, particularly recently, I think, with these huge companies coming to market.
- [08:36]
B
Is it not better to just more or less ignore all this stuff? Yeah, it does matter that Amazon and Alphabet own meaningful chunks of anthropic and SpaceX, but isn't it better to just look at their operating earnings? I mean, Warren Buffett always hated this mark to market accounting and how it would treat his publicly listed shares. For years, Buffett was complaining that these accounting rules made Berkshire Hathaway's reported earnings meaningless because the volatility of its equity holdings swamped its operating results.
- [09:10]
A
And I think Warren Buffett's right. I think if you look at operating profit, it does iron out these volatile components. Unfortunately, when you look at forecast, you won't find forecasts of operating profit. And when we are in a period such as we've got now, where the market's reweighting the past, not the future, you can get these huge distortions, which are big boosts for now and then essentially what looks like a crash, whereas it's just a lump because of this weird valuation measure.
- [09:43]
B
I've got a feeling that a lot of the standard metrics people look at are very misleading right now. For example, the trailing price to earnings ratio, where you measure the price of a stock today versus the earnings over the last 12 months, that's going to look artificially low because the earnings were artificially high. So maybe companies are going to look cheaper than they did. So, for example, Alphabet is currently trading at a multiple of around 18 times in terms of trailing pen. But if you normalize those earnings and stripped out its stakes in SpaceX and Anthropic, it's more like 26 times as a multiple. So a big difference. And I think you even have to be careful at the index level when you're looking at anything backward. Looking at the moment trailing price to earnings, but also things like the CAPE ratio.
- [10:36]
A
But this is why I'm always banging on about using alternative valuation measures, if you can. The difficulty, I think, is that they're not well reported. So for the index level for the S and P, for example, you don't see price to free cash flow or price to book, or at least they're much more difficult to come by. My worry, I think, at the moment is that if you look at the S&P 500, the forecast earnings still look pretty chunky. They've been revised up massively, in aggregate at least. So the US is not looking so expensive. When I think there's A lot of optimism priced into that.
- [11:10]
B
I saw that the forward price to earnings ratio for The S&P 500 briefly dipped below the five year average because of those revisions to earnings, like you say.
- [11:22]
A
Yeah. In fact, that's why I did this granular approach to looking at the forecast earnings for every region. What I wanted to create was my own version of it using different numbers or alternatively let people drill into it to see what on earth is going on because the headline figure might be misleading.
- [11:40]
B
Rominsalternative facts.com I think you could be the John Butters for the uk.
- [11:48]
A
Yeah, there's an ambition.
- [11:51]
B
I guess one thing to be careful of if you're trying to adjust all the numbers yourself on a company by company basis is if you're stripping out Alphabet's earnings from its stake in Anthropic, you should also remove the assumed value of Anthropic from the stock price. You've got to adjust the numerator as well as the denominator, to be fair here.
- [12:15]
A
But it's not just things like the anthropic valuation, which is distorted earnings this season. There are other more subtle effects which are also due to accounting rules. I think the biggest one is looking at the benefits of AI versus the costs. So the costs are on a slower clock than the gains. So for example, if we look at the four big hyperscalers, they bought about $434 billion of property and equipment in the four quarters to March 2026.
- [12:46]
B
So that's your data centers, right?
- [12:48]
A
Yeah. And unfortunately that hardware depreciates pretty quickly. But so far we've only had $149 billion of reported depreciation.
- [12:59]
B
So what you're saying is there's a lot of costs to come which have been incurred. They just haven't hit the income statement yet.
- [13:07]
A
Which again is just a result of the way these things are accounted for.
- [13:11]
B
Obviously what you can do is look at free cash flow. What's actually happening to the cash that comes in and out of the door at these companies. And for the hyperscalers, that's projected to fall more than 91% this year, even as their official net income they're recording will rise by around 25%. That kind of tells it all, doesn't it? The cash is being spent now, but they're still reporting accounting profits.
- [13:41]
A
That's such a change from the past when these companies didn't have those kind of depreciation costs. And that's the drawback of becoming dependent on physical stuff. If you produce ideas and software. Well, you don't have to worry so much about depreciation and you stop being a free cash flow juggernaut if you have to spend on this stuff.
- [14:03]
B
I think Alphabet is the most shocking case. So it just reported in this quarter negative free cash flow. So almost 6 billion more went out of the door than came in. It raised around $70 billion in new equity, it suspended its buyback and it doubled its long term debt and it lifted its CapEx guidance to around $200 billion for this year. They are making a massive, massive bet that AI is worth this money.
- [14:38]
A
So not a bubble then?
- [14:39]
B
Michael that's the question. It's basically the only question in markets right now.
- [14:45]
A
My concern is that it's not going to pan out, that there's going to be something, some shock, some undercutting from China and it's not going to look great for the US market, which is really pinning all of its hope on one thing.
- [14:59]
B
And that thing is Robot Utopia.
- [15:05]
A
Today's episode is sponsored by Trading212, the platform bringing commission free investing to everyone. Trading212 stocks and shares ISA is the cheapest way to invest with 0 commission and one of the lowest FX fees I could find on the market. Looking to keep things simple, you could easily automate your investing with PIs that allow you to rebalance your portfolio at the click of a button. Customers with Invest accounts can also benefit from the Trading212 card which has no FX fees and true interbank rates. Many happy returns listeners can claim free fractional shares worth up to £100. Just create and verify a Trading 212, invest or stocks ISA account. Make a minimum deposit of £1 and use the promo code Ramin R A M I n within 10 days of signing up or use the link in the show notes. When investing, your capital is at risk and you may get back less than invested. Past performance doesn't guarantee future results. Pizen Auto Invest is an execution only service, not investment advice or portfolio management. Automatic Investing refers to executing scheduled deposits. You're responsible for all investment and rebalancing decisions. Free shares can be fractional. 212 cards are issued by Paynetics, which provide all payment services. Trading 212 provides customer support and user interface. Terms and fees apply.
- [16:35]
B
Ok, that's enough about the US for now. It's not the only country in the world. There are plenty of other places to invest. And if you're worried that the US might be in some sort of a bubble, I imagine you would have already moved some of your money to other markets.
- [16:49]
A
Yeah. This really worries me, which is a lot of people I speak to, they've tilted away from the us, some dramatically so, because we now have these ex US developed world funds. So you can do it pretty easily and the size of those tilts can be huge. Another way of doing it is tilting to value, which has worked really well because a lot of those chip makers were value stocks. So that's rallied in a crazy way. But I'm worried that that's not going to last as a tilt, as a good tilt, because if the US does manage to pull this one off, then it could see huge earnings growth in the future.
- [17:26]
B
So you're trying to have it both ways. Romin, you're saying the US might be in a bubble, but also don't tilt away from the us, that's too big a risk.
- [17:33]
A
Well, they always seem to land on their feet. They come up with a new narrative and maybe that's what their really amazing skill is, not only growing profits, but telling a story. I think that's what we're really bad at doing in Europe and the uk.
- [17:47]
B
But over the last couple of years, the US stock market has underperformed the rest of developed markets. Is that right?
- [17:55]
A
Yeah. I was shocked. I posted this on Sunday. I was just kind of pootling through some of the indices I look at and some of the ETFs, and I've got a developed Xu US ETF I've been tracking versus US. And in sterling total return terms. Yeah, the US has underperformed developed ex US over two years, which no one seems to be talking about, which is odd.
- [18:18]
B
And if you go back over the last five years, the FTSE 100 in terms of total return has more or less kept up with the S&P 500, which again is a kind of a narrative violation. No one's talking about that.
- [18:32]
A
My small cap portfolio is doing so well. Very much an unsung hero, I think, the uk.
- [18:39]
B
So much of this is about choosing your starting dates carefully, though the moment you start extending that slider back beyond five years, it gets much less pretty. Very quickly, I was listening to some
- [18:51]
A
analysts from Goulburn talking about this and they were saying that the US probably will come back to dominance, and that's because of the fact that it reinvests a lot of its profits back into companies to stimulate future earnings growth.
- [19:06]
B
You know what's weird, actually about the current quarter and we've been dragged back to the US straight away. But anyway, let me just say this point you're talking about reinvesting money into the companies. The tariff refunds that have been playing out have been a kind of modest tailwind to corporate profits this quarter. So after the Supreme Court's ruling, almost $130 billion of refunds have been accepted by the Customs authority and around $100 billion have already been paid out to companies. So, for example, Apple and Disney were both recipients of tariff refunds, which had a small but, you know, not insignificant effect on their earnings. So Disney recorded around $100 million in tariff refunds, which added 4 percentage points of income growth to its theme park segment, which is the driver of its profits. Really?
- [19:55]
A
Jiminy Cricket.
- [19:57]
B
Yeah, Mickey Mouse accounting, isn't it? But what's going on in Europe in terms of fundamentals? The returns have been good over the last couple of years. Is it being driven by better profits?
- [20:12]
A
Yeah, nobody talks about this. I can't believe it. But the Stoxx 600, which is a really useful large cap index, which covers most of the big companies in Europe there, the net income is up around 19.1% now. Only about three quarters of the companies have reported so far. But the full season expectation is above 22% earnings growth year on year. And that's the largest since Q3 of 2022, when we had that huge bump coming out of the crisis.
- [20:43]
B
But if we've been scouring for caveats in the us, I think it's only fair that we do the same thing in Europe. And there are one off factors at play here as well. Namely the big rise in oil prices has helped deliver stellar profits at energy companies. If you stripped energy out of the index, earnings growth would come down to around 12% year on year.
- [21:10]
A
Interesting factoid. If you had to predict the US energy weighting versus the uk, what would you guess it would be?
- [21:17]
B
Are you talking about the FTSE 100 which has a big share of energy, or are you talking about the UK market as a whole?
- [21:25]
A
UK market as a whole. I just took a slice of the largest cap stocks listed here.
- [21:30]
B
I mean, the gut instinct would be it's bigger in America because of all the shale oil, but then as a percentage of the index they got massive tech companies. So maybe it's bigger in the UK.
- [21:40]
A
Yeah, 8% in the UK versus 3% in the US. That really surprised me when I saw the stat because like you say, you always think that the US is a kind of oil producing country now.
- [21:52]
B
Well, it is an oil producing country, but it's also a data centre producing country.
- [21:57]
A
It's a many things producing country, but just scooting through the P Es for those three regions, U.S. europe and U.K. the forward PE for the U.S. is about 20, 15 for Europe, 13 for the U.K. strip out energy and the story changes a tiny bit for the US Becomes a little bit more expensive, less than a percentage point more expensive, and the UK goes from 13.5 times to 14.5 times. So the UK isn't cheap because British companies are bad companies. It's cheap because it's structurally overweight the sectors that are cheap sectors.
- [22:36]
B
So it seems like we're trying to tell a narrative of these markets based on two sectors. Energy, where things are happening with oil prices and commodity prices, which weren't predicted at the end of last year, and tech, which is going through an almighty change with some companies massively benefiting and then some software stocks really being punished. We've talked about energy in Europe. Have you got anything to say about tech in Europe?
- [23:04]
A
Well, the first thing to say is there's not much of it. So the entire European tech sector, European IT totals about $1.3 trillion in market cap. US IT totals around 26 trillion, and that's in dollars. So Europe's entire listed technology sector is about 5% the size of America's, smaller than just one company, which is Broadcom, and about a fifth the size of Nvidia. But some of those companies are really good companies. And to first order, European tech is just two companies, ASML and SAP. Those two make up about three quarters of the entire sector, 52% for ASML and SAP makes up about 19%. And the really shocking thing is that if you look at the aggregate valuation for European it, weird as it is, it's actually more expensive than US Tech in total.
- [24:06]
B
That is unexpected and something I've not seen mentioned before. Is it because you could make the case that asml, that Dutch company which is so critical for the manufacture of semiconductors, you could say that's the most important company in the world, or at least the biggest bottleneck when it comes to building the future.
- [24:33]
A
Now, fortunately, this is to do with physics, so it's in my wheelhouse. But the tech in which they dominate is something called extreme ultraviolet lithography. So ultraviolet is the stuff that when you go out, it burns you and gives you cancers. But what they do is they generate light, which is very, very short wavelength. And that's critical because you want to edge tiny little troughs in silicon. And they can do that really well.
- [25:01]
B
The only company that can do it right in terms of high end chip manufacture.
- [25:06]
A
That's right at the moment they've got this huge edge. But what worries me is that other companies around the world are desperately trying to reproduce what they can do.
- [25:16]
B
When you get a really profitable monopoly, inevitably there's going to be other companies trying to reproduce what they can do. The question is, will they be able to? I mean, I think if you look at what Beijing wants, if it could have one thing, the top thing on its wish list would be a Chinese version of asml. They want to manufacture their own frontier AI chips.
- [25:38]
A
I think what people don't appreciate is that it's not just one company, it's a whole ecosystem of companies which produce components that can do this stuff. So you need mirrors which can reflect this kind of light. And Carl Zeiss actually makes those. They're based in Germany. If you want a laser source that's produced by another company based in the US called cyma C Y M E R I'm sure I pronounced it wrong, but that was acquired by asml. And lots of companies have co invested with ASML in order to produce this ecosystem. Companies like tsmc, Samsung and Intel. And they did that investment in return for early access to the technology itself.
- [26:24]
B
There seems to be a whole industry that's grown up of analysts scouring the world's sort of microcaps, looking for companies which manufacture unheralded components that go into the supply chain around AI, wherever that might be. And my favorite example is a Japanese toilet manufacturer called Toto where it worked out that its ceramics business was kind of unique. It was making such fancy toilets that if it pivoted, it could instead make electrostatic chucks that would be used in the making of memory chips. And once that happens, its share price just soared.
- [27:09]
A
I love that story. It shows how you can take one of these physics applications toilets which have such smooth surfaces at the nanometer scale that you don't get skid marks.
- [27:22]
B
Is that what it was? That was what the technology was for?
- [27:26]
A
Yeah, it was because bacteria accumulate in all the nooks and crannies. So they actually made it ultra smooth and then they realized they could do these industrial spin offs.
- [27:36]
B
The market wants what it wants. Now we're all going to have to have unhygienic rough poos just because of this AI takeoff.
- [27:45]
A
I love that story.
- [27:47]
B
So the market's obsessed with AI right now and it underpins a lot of the valuations. But even having said that, there has been a broadening in the market to some degree in the US 10 out of the 11 sectors are growing at the moment. Healthcare is the only one that's declining in terms of earnings. But still the biggest contributors outside the magnificent seven are memory chip companies like Micron, and at the moment energy companies like Chevron and Exxon. But then I wonder that when we look at earnings and sectors and, and we say, oh, it's being driven by these specific stocks, these specific sectors, is that a game we're always playing? There's always something doing well. We're always saying, if you strip out this, it doesn't look so rosy. But that's the whole point of being broadly diversified. You don't have to worry about stripping anything out. It's all in the pot. You own everything.
- [28:40]
A
I think that's true. And it's also the danger of having a narrative that we focus on because the narrative simplifies by definition. It throws away a lot of information. Just because as humans we have limited cognitive capacity. You can only think about a certain number of things at one time. And we think in terms of stories, we don't think in terms of huge vectors of numbers.
- [29:03]
B
Are people too obsessed with whether this is a bubble Right now?
- [29:07]
A
I think people are too focused on concentration in the US and they don't look at concentration elsewhere. So, for example, if you look at Europe's earnings growth, that's much more concentrated in energy and financials and in the UK even more so. Nobody ever talks about concentration in the uk, but we are a more concentrated market. But the reason why all of this matters is people often say to me, why do stock prices go up in the first place? And it's because of earnings growth. That is the engine of why your pension increases over time. And if that engine falters or stops, well, that's going to be a problem for everyone.
- [29:46]
B
But as much as we caveat it, 50% year on year earnings growth for the S&P 500. Strip out Alphabet and Amazon, as we said, and it falls to more like 30%. But still, you don't usually get a big correction when that's going on, not
- [30:02]
A
until the engine does sputter. So I think that's why it's useful to monitor this stuff. You can see if there's going to be trouble ahead. I'm not sure that would change your investing behavior, but I think it's really important to understand the color behind what's going on in the numbers.
- [30:18]
B
Do you think the whole thesis is going to get tested when we finally get to the point that OpenAI and anthropic hit the public markets. Elon Musk has done an amazing job and he's got SpaceX away near the peak. He's probably the greatest capital raiser of all time. Are Anthropic and OpenAI going to pull it off and get these trillion dollar private companies floated at what on paper looks like optimistic valuations?
- [30:51]
A
I think Musk does a great job of creating these narratives and then delivering on some of them, not all of them. It has to be said, I'm not sure that OpenAI and Anthropic are quite as good at building that narrative and the excitement that goes around these IPOs. But maybe that's not a bad thing. What it would mean is that the valuations wouldn't be crazy in the first place and we wouldn't have such a disappointment afterwards as we did with SpaceX. But I do love the excitement around these IPOs and the technology that comes with them and their transformative effects. And even if it's a bubble, I don't think you can have these tech changes without a bubble.
- [31:30]
B
I think people will be much more positive generally about AI if they can see it improving their day to day lives, which we haven't really had yet. It's solving, you know, novel maths problems which have been outstanding for 50 years. It's worked out protein folding to a large extent and increasingly they seem to be escaping from their sandboxes and hacking other companies. But I think everyday life isn't that different to how it was five years ago.
- [31:58]
A
Not yet. I think it will be. But my mother always used to say they can send a man to the moon, but they can't make a good ironing board.
- [32:07]
B
There is probably an ironing board company out there with some kind of ceramics process that is just waiting to be the next mega cap stock. You just got to find it.
- [32:18]
A
Now we mentioned that granular data that I've been working on. You can get access to that indirectly via the SP Forward valuation tracker and lots of other goodies as part of our membership. Just go to pensioncraft.com membership to learn more.
- [32:35]
B
Okay, today's Dumb Question of the week. Why do companies report every three months?
- [32:42]
A
It's interesting. The world is split when I read the ft, for example, between people who think it's a good and bad thing. On the good side, yes, you want transparency, you want to see what's going on in the company, ideally as frequently as possible. On the bad side, you've got people who say this is just a pain in the ass for the companies. It's Very expensive. It's, it doesn't really add much if you do it quarterly rather than semi annually. And it might lead to short termism because you're just trying to make the numbers look good over the short term.
- [33:14]
B
I always thought that quarterly reporting inevitably makes management focus on the short term. But then what we've seen with the AI build out is that massive companies are willing to torch their free cash flow for a payoff that may be many years down the line and uncertain. So it seems to have not been a constra on these companies thinking long term.
- [33:37]
A
Yeah, I don't buy the short termism argument. I don't really see that at all. I think they're two completely separate things. And IDA are on the side of more frequent reporting. If anything, given changes in technology, I think you could have almost continuous reporting when it comes to working out what's going on with a company, its internal financials.
- [33:59]
B
But things are going to go the other way because in May this year, the securities and Exchange Commission in the US proposed letting American companies report just twice a year if they wanted to. Now this would be a massive change, maybe the biggest structural change to US reporting in 75 years. And it's something Trump's been pushing for. And the consultation has just wrapped up last month, so we should find out in the coming months what, whether it's going to take effect.
- [34:31]
A
What's interesting is the history of this. The reason why we have this disclosure regime in the first place in the US at least, is after the 1929 crash. The securities and Exchange act of 1934 created it, presumably to stop crashes like that happening again. If you can see the fundamentals, maybe you won't buy into these crazy bubbles,
- [34:53]
B
but in terms of the frequency and why quarterly, there was a period of decades after the big crash and the Great Depression where the US just couldn't make up its mind. So it went back and forth between demanding quarterly results and semi annual results. I think finally in 1970 they settled on official rules where public companies had to update the market every three months.
- [35:20]
A
And exchanges can do this themselves. They can actually impose more frequent reporting standards on the companies that list on their exchange. So the nyse, which is the New York Stock Exchange, required quarterly reporting for newly listed companies in 1939. So in a sense the SEC rule just made something that was the norm official.
- [35:42]
B
I think it's true that more than 90% of companies were already reporting quarterly by the time it made it a requirement. And I think the rest of the world tends to mirror what the US did. There is an interesting case study actually in the UK where the EU scrapped the requirement for quarterly statements around 2014 and most of the FTSE went to half yearly reporting. But there's been a lot of academic research which looks at the change in the UK and the broad finding seems to be that companies that dropped quarterly reporting didn't suddenly become more long termist in their view. They didn't invest more and they weren't noticeably making decisions looking way out in the future. However, they did seem to lose some analyst coverage if they went to half yearly reporting.
- [36:36]
A
I guess there's less to talk about. You can kind of see why that would happen now. If you've ever worked for a company, you'll know there'll be these blackout periods where you're not allowed to discuss what's going on in the company because it's about to be reported. I think the worry is that these long periods where stuff's happening in the company but it's not reported yet increase the inclination to leak that information or use that information. So I think there's no question that it's going to become less transparent. So what's going to happen presumably is there's going to be more guesswork about what's going on and a huge asymmetry of knowledge between the people who know and the people who don't.
- [37:17]
B
It'll be interesting to see what does happen in the US if they do relax the requirements for quarterly reporting. It seems that most analysts expect that a lot of companies will go to semiannual reporting, but will continue to do quarterly investor calls and marketing even if the official numbers are only half yearly.
- [37:38]
A
I think that's the worst of both worlds. These kind of messages from companies are almost meaningless. Yeah, of course you think it's a great company, I know that. But what's the new information?
- [37:50]
B
But then you said the US are great storytellers. The new information is the next chapter in the story.
- [37:57]
A
Yeah, but I want both. I want the story and I want the facts. Please.
- [38:03]
B
Thank you for joining us for Many Happy Returns. Keep sending us your questions, no matter how dumb, @mhrtioncraft.com and do remember to
- [38:12]
A
check out pensioncraft.com for all the information about our membership courses and investment coaching options.
- [38:18]
B
Many Happy Returns is a Pensioncraft production co hosted and executive produced by Romin Nikiza and Michael Pugh. This podcast is for informational and entertainment purposes and is not financial advice. We do not provide recommendations or endorse any decision to buy, sell or hold any security. We cannot be held responsible for any actions listeners may take. And investors are encouraged to seek independent financial advice.