EPS or earnings per share drive stock prices. Analysts routinely predict future EPS and that results in stock prices going up or down, at least in the short term.
Quarterly earnings should mean very little but they seem to mean a lot to investors and they drive companies to make very poor short-term decisions.
In an economic downturn we should expect earnings to drop, but to keep things moving along as best as possible we need people working, spending and saving.
Instead large companies conduct layoffs, cut pay, stop 401k matches simply to make things look better in the short term when nothing fundamental had changed with their business. In other words as the economy improves, earnings will again pick up or stabilize.
Of course, running a business is not all that simple, but adding to economic hardship and creating stress in individual’s lives simple to sustain stock prices in the next quarter or so is unnecessary. Declining earnings in the next three or six months should be irrelevant to the stock market, especially in recessions.
But, of course, many executive compensation plans reward based on EPS. That too needs reconsideration.
Boosting short-term earnings on the backs of workers is despicable. Instead of playing the EPS game, sound management should be able to cope with short-term economic stress … just as we expect American families to do.
Damn the analysts, full speed ahead.