As the U.S. economy and stock market recover from the Covid-19 pandemic, investors are returning to their pre-pandemic expectations for how companies report financial results.
While investors have maintained their pandemic-driven focus on companies making long-term investments, they have shifted their expectations for earnings and guidance back to “less permissive pre-pandemic norms,” according to Boston Consulting Group’s most recent Covid-19 investor pulse survey. Investors’ recovery-driven mindsets are also evident in their shifting approach to capital allocation, with survey respondents focusing less on capital preservation and more on capital distribution.
From April 29 to April 30, BCG surveyed “leading” investors, representing investment firms with over $5 trillion in combined assets under management, about their expectations for the U.S. economy and stock market and their perspectives on impending decisions from corporate executives and boards of directors.
When asked whether it is important for the management of financially healthy companies to provide or revise guidance within the next 90 days, 87 percent of investors answered “yes,” the highest proportion to say so since BCG began conducting the periodic surveys in March 2020.
“For the very first time in the 15 pulse checks, we’ve really seen a kind of collective exhale,” said Hady Farag, leading director and BCG partner, in an interview with Institutional Investor. During the past year, Farag said, investors have focused solely on making sure that companies survive the pandemic. “Investors fully accepted that companies withdrew their guidance and [earnings per share] basically had no meaning,” he said.
“Things are Normalizing”
Throughout the pandemic, Farag said that investors have prioritized companies that invest in core capabilities, even at the expense of delivering on earnings per share. Even now that companies are emerging from pandemic-inflicted financial disruptions, investors are still thinking about the long-term growth of surviving entities, Farag said.
“This long-termism is something very different,” he said. “[Investors] are looking at things much more long-term than they were previously.”
According to the survey, the recovering economy allows management more leeway to invest in their companies: Investors’ strong focus on liquidity and “maintaining financial resilience” throughout the pandemic appears to be petering out. According to BCG, only 54 percent of respondents said they believe it is important for healthy companies to intensely focus on preserving liquidity, a record low since the surveys began last year.
Investors are also easing up on the importance of quick access to debt financing for companies. In another record low for the survey, 56 percent of respondents said they believe healthy companies should quickly access all available sources of debt financing, decreasing 15 percentage points since April 2020.
“Same thing with giving companies a blank check — in terms of not having to provide guidance, not holding companies and management teams’ feet to the fire in terms of delivering on either guidance or consensus estimates — that is all on a pretty much record low level compared to what we’ve seen over the past 14 surveys,” Farag said. “Things are normalizing.”
Optimism about the economic recovery also extended to positive broader economic outlooks in the survey. Since the last survey in February, investors have become more bullish on the U.S. economy, with the proportion of bulls increasing from 63 percent of respondents in February to 73 percent in April. In March 2020, 13 percent of respondents predicted a V-shaped economic recovery; in the most recent survey, that jumped to 27 percent of respondents.
“The strong trajectory that we’ve seen this year has raised the bar for investors,” Farag said. “It’s easy to be bullish when the market is down. Now that we’re in an up market and have a lot of the rebound price in, that raises the bar a lot.”