Uncertainty Prompts Growing Number of Companies to Revise Revenue Guidance

The man known as “Dr. Doom” in the financial world has some typically sour news about the global economic forecast. In an interview with Bloomberg this week, economist Nouriel Roubini warned that we’re quickly approaching a “long and ugly” recession. The Roubini Macro Associates chairman and CEO, who gained notoriety for predicting the financial crisis in 2008, pointed to a slew of economic ills that he believes will contribute to a widespread slowdown, including inflation, debt-ridden corporations and governments, and the ongoing impact of the COVID-19 pandemic.

It’s easy to write off an apocalyptic projection from an economist whose brand is glass-almost-empty. But recent signals from revenue forecasts don’t portray an air of confidence coming from corporate America, either.

Roubini and other economic Cassandras tend to view even the most ambiguous data points as cause for alarm. The corporate world prefers a mood-centric prism when interpreting mixed signals from markets, best summed up by the term “uncertainty.” After all, who can really predict with complete confidence when the next pandemic will hit or how central banks will react to concerns about inflation?

Of course, life is uncertain by nature; companies aren’t telling us anything we don’t already know when they attribute their inability to offer reliable earnings guidance to uncertainty. Nevertheless, that was the refrain offered by chief financial officers in a recent Wall Street Journal article that delved into their latest struggles to put together revenue forecasts. The piece cited data revealing that in the second quarter, 129 companies in the S&P 500 revised their guidance on annual revenues or earnings per share. That represented a 50% increase from the same period in 2021. Most companies that published revisions between April and June “either cut guidance, narrowed the range or provided mixed updates by revising revenue in one direction and EPS in the other,” according to the article.

The increased revisions don’t necessarily portend economic disaster, but there’s reason to believe executives essentially are throwing up their hands when predicting the future. To be fair, forecasters inside companies really are dealing with a confluence of unusual influences right now. Aside from the pandemic, Russia and Ukraine are at war. Europe is experiencing an energy crisis. Political analysts are questioning the stability of American democracy.

Where does this leave companies’ revenue-guidance processes? It’s certainly possible that as the factors contributing to the current global instability disappear over time, companies can get back to forecasting with greater confidence. On the other hand, the fact that COVID-19 forced many companies to re-evaluate their approaches to budgeting and forecasting now seems fortuitous in retrospect. Given that businesses historically have relied on backward-looking information to make forward-looking projections, adopting more dynamic processes like rolling forecasting just makes sense.

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