The Guide to Guidance in 2024: Keys to a Meet or Beat Year Amid Market Uncertainty
The Federal Reserve’s recent decision to hold interest rates steady coupled with indications of future rate cuts sent Wall Street’s major indexes soaring with the Dow reaching a record close in December. While a soft landing for the US economy is seeming more likely, significant risk remains including rising geopolitical tensions around the world as well as a US presidential election that has historically increased market uncertainty. When it comes to setting 2024 guidance, companies should proceed with caution and conservatism.
Strike the right balance with 2024 guidance
The third quarter 2023 earnings season highlighted the Street’s growing intolerance of negative earnings surprises. Companies that reported negative surprises saw an average decline of 4.5% two days prior to earnings release through two days after. This compares to the five-year average pullback of 2.3%.
While the recent market momentum may have analysts contemplating raising expectations for a rosier 2024, we wouldn’t expect companies to get credit for being overly optimistic. With the high level of uncertainty, the fourth quarter should be used as an opportunity to set realistic expectations that take into account the various puts and takes that occur in a market recovery.
Below are a few key strategies to implement when establishing 2024 outlook:
Use wider ranges
Given the macroeconomic uncertainty that remains in the market, companies still have a wide berth for using wider ranges and the ability to be conservative. Setting a wider range initially allows for the range to be narrowed as the year progresses while remaining on track to meet or beat the annual guidance. Walking the line between conservatism and sandbagging is critical, however, as sandbagging can erode credibility over the long-term. So, make sure the range is backed up by solid assumptions that can be shared with the Street for the low, mid and high ends of the range.
Get the timing right
Companies that typically stick to annual guidance should consider implementing some qualitative, quarterly color to steer analysts to more accurate quarterly estimates. With the supply chain largely recovered, employment stabilizing, and inflation starting to decline, market momentum is high. The Street may expect recovery right out of the gate, but these benefits can take time to flow through the P&L. For example, communicating that the company expects the recovery to be weighted to the back half of the year as it works through higher cost inventory can help frame the timing of expected improvement. With the Street punishing missed estimates more aggressively than in the past, some soft qualitative quarterly guidance will help lead the sell side to more realistic quarterly and annual estimates and help ensure a meet or beat headline.
Anticipate the Street’s reaction and be ready with responses
Review the 2024 consensus estimates – does it vastly differ from management’s expectations? If so, make sure the commentary during your call helps analysts get a clearer picture of the year, and allows you the tools necessary to support follow-up conversations. Further, it is important to consider how the Street might react to company guidance. Craft messaging that includes assumptions and a high-level, well-articulated bridge to management’s current expectations. Hit the most critical points in the prepared remarks to get ahead of the inevitable questions from scrutinizing analysts and be prepared with the action plan and roadmap to provide a detailed description of the path forward.
Make 2024 a year to celebrate
As organizations wrap up 2023 and move into 2024, there are new positive signs to consider even as companies continue to contend with lingering uncertainty. Because the Street is clearly not tolerating misses, setting achievable targets will be especially important as companies start the year. With careful planning and strategic messaging, companies can set the tone for a successful 2024 and can look forward to celebrating achieving their numbers in the months ahead.
Need help with planning guidance for 2024? Connect with the strategic communications experts at Riveron for comprehensive support with your investment narrative and messaging for the new year.