When 24% Gains Are ‘Average’

Companies will be posting some spectacular first-quarter earnings soon. So what’s the problem? 

On paper, the financial results looked great. Despite lingering operational issues stemming from the pandemic and the challenges of remote work, the company’s first-quarter revenue was up, costs were down, and profit margins expanded. And yet, even with a seemingly stellar 15% earnings growth, its stock price dipped.

As first-quarter earnings season kicks into gear this week, leaders will face a new problem: double-digit growth that won’t impress anyone, and even disappoint many. With the economy coming back as vaccination programs expand in the United States, analysts are now estimating an eye-popping earnings growth of 24% for the S&P 500. And with numbers like that, firms with double-digit growth may find themselves appearing “just OK.”

“The question is, why isn’t [any] growth at all considered outstanding coming out of a pandemic?” says Tierney Remick, a Korn Ferry vice chairman and coleader of the firm’s Board and CEO Services practice. “There is so much money in the marketplace—investors are just seeking too much, too soon.”

Maybe so, but just last week, the major US stock indexes hit new record highs, suggesting investors are shifting their focus from the pandemic back to financial performance. But for their part, corporate leaders are still balancing a host of other issues, from health and safety concerns to supply chain bottlenecks to figuring out how and when to bring people back to the office. “Companies can’t completely ignore what’s going on, even if investors appear to have forgotten everything that happened,” says Remick.

For leaders, that means threading an extremely narrow needle when it comes to managing growth expectations. After all, CEOs can’t be content with 12% earnings growth if their investors expect 24%. At the same time, however, study after study shows that the elevated employee productivity levels that helped push many companies to outperform during the pandemic can’t be sustained. To be sure, if leaders push their teams too hard now, it can end up resulting in underperformance and diminishing returns, says Evelyn Orr, senior vice president and chief operating officer of the Korn Ferry Institute. “People have just run a marathon, and now they are being asked to do it again with no break,” she says of the pressure to meet financial expectations.

One way that leaders can help employees catch their breath while balancing investor demands is by restoring financial guidance—but on an annualized rather than quarterly basis. Last year, many CEOs stopped providing forecasts or guidance for upcoming quarters to Wall Street because of all the uncertainty COVID was causing. Much of that remains, but experts say providing an annual range would give CEOs the flexibility they need to manage effectively while still offering investors a window into the business.

Dennis Carey, a Korn Ferry vice chairman and coleader of the firm’s Board and CEO Services practice, also advises engaging in proactive investor outreach. He says keeping major shareholder groups informed about where the company is going, how it is performing, and what it is leaning into can go a long way toward keeping expectations in check. Regular dialogue can serve as a way to remind investors of the challenges leaders still face. “You can also remind investors that the pandemic is still here,” Carey says.

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