Deregulation Meets a Hype Cycle: How Reducing Oversight Could Amplify the Next Correction

Markets are stretched. Nvidia, now the world's largest company, swings five percent in a day as if it just went public. Questions about stagflation remain unresolved. So what's the logical next step? Most people probably wouldn't say "let's reduce disclosure requirements," but that's exactly what SEC Chair Paul Atkins is proposing. His plan would allow companies to choose their own reporting frequency, whether quarterly, semi-annual, or annual, based on industry characteristics and investor expectations. The stated goal is to reduce regulatory burden and allow companies to focus on long-term value creation rather than short-term targets.

For some, the proposal sounds reasonable on paper. But changing reporting standards creates ripple effects across market structure that go beyond simple cost-benefit analysis. Some of these effects create tactical opportunities for sophisticated investors. Others introduce systemic risks that could amplify the next market cycle.

When 3M Tells You About Medtronic

If reporting frequency becomes industry-specific or company-specific, an interesting dynamic emerges around diversified conglomerates.

Consider a scenario where reporting standards settle along industry lines. Let's imagine technology companies report quarterly, healthcare companies report semi-annually, and utilities report annually. But then you have conglomerates like 3M, Honeywell, or Siemens that operate across multiple sectors.

These diversified companies would likely report at the frequency of their most regulated division. So if 3M has consumer products, healthcare, and industrial divisions, they'd probably consolidate and report quarterly because one of those segments requires it.

When 3M publishes quarterly earnings and breaks out segment performance, say Healthcare revenue up 15% and Industrial down 8%, you suddenly have fresh information about sectors where pure-play competitors might only report semi-annually or annually. If medical device companies like Medtronic or Stryker are reporting twice a year, 3M's quarterly healthcare disclosure becomes a leading indicator.

This isn't a novel phenomenon. Cross-company earnings reactions already exist. When Apple reports iPhone strength, the entire supplier chain moves. When TSMC guides down, Nvidia reacts. Markets have always used one company's data to infer another's performance.

But fragmenting reporting standards amplifies the severity of these reactions. If Medtronic only reports twice a year, six months of information builds up between disclosures. When 3M drops fresh healthcare segment data in the interim, the repricing of pure-play healthcare stocks becomes more violent because there's been a longer information drought.

Traders who recognise these cross-company relationships could exploit an informational advantage in the transition period, though market efficiency would eventually price it away. The more durable effect is added volatility. When companies finally report, their earnings reactions become more severe because results might diverge sharply from what conglomerate disclosures suggested. If Amazon reports strong AWS numbers, the market prices in cloud sector strength. But when pure-play cloud competitors later report weakness, the gap reveals Amazon's execution advantage rather than sector trends. That idiosyncratic strength or weakness gets amplified when there's been a longer information drought.

Who Benefits From Opacity

The second-order effects of reporting flexibility are more concerning.

Companies like Amazon, Apple, and Microsoft would benefit from less frequent reporting. These firms have fortress balance sheets, proven management teams, and long investment horizons. Quarterly earnings pressure creates perverse incentives. Miss EPS, even if just narrowly, and the stock drops 5%, so management cuts R&D or delays strategic investments to hit the number.

A 2023 EY survey of finance leaders found that 76% face pressure to hit short-term earnings targets, with half admitting they're meeting those targets by cutting funding in areas they consider long-term priorities. This isn't hypothetical. When quarterly earnings pressure mounts, companies cut the most flexible expenses first, including strategic investments with strong long-term rationale. Annual reporting would give management breathing room to execute multi-year plans without reactive quarterly pivots.

But the same flexibility that helps Amazon also helps companies where frequent oversight is the only thing keeping management accountable. Enron and WorldCom committed fraud despite quarterly reporting requirements. Extending the interval between disclosures from three months to six or twelve months gives fraudulent or poorly managed companies more time to obscure deteriorating fundamentals.

This creates a two-tier system. Strong companies benefit from reduced reporting burden. Weak companies get additional cover. The challenge for investors becomes distinguishing between the two, especially in sectors with lower analyst coverage.

What Goes Public When Nobody's Watching

Among the various factors keeping companies private, reporting requirements play a role. The compliance cost, the quarterly scrutiny, and the short-term performance pressure all make remaining private more attractive, especially when private capital is abundant.

If Atkins' proposal passes, that calculation changes. You can access public capital markets without the quarterly treadmill. For many companies, this tips the scales toward going public.

The question is what kind of companies this affects. The highest-quality private companies like Stripe and SpaceX will likely stay private regardless. They have access to patient private capital at favourable valuations. The companies most likely to take advantage of relaxed reporting standards are the marginal ones. The ones that need liquidity. The ones that struggled to raise in private markets at their desired valuation.

We're currently in an AI infrastructure cycle. Every startup with GPU capacity and transformer models can position itself as an AI play. Many of these companies don't have sustainable business models yet. Some never will. But in an environment with reduced reporting requirements, they can go public anyway and delay the reckoning.

The current AI leaders like Nvidia, Microsoft, and the hyperscalers are generating substantial cash flows. Their valuations might be stretched, but the underlying businesses are real. The risk isn't with the current wave. It's with the next wave, the marginal AI companies that IPO under looser disclosure regimes in 2026 and 2027. Such a flood would be concerning enough on its own. But there's another regulatory change on the table that could make it worse.

When Retail Gets Access to Borrowed Money

These marginal IPOs will need buyers. But retail has been chasing AI stocks for years and may finally be running low on cash. The solution, apparently, is to make it easier for them to borrow money to fund these bets.

Currently, margin accounts under $25,000 face restrictions on day trading frequency. It's not a perfect mechanism, but it effectively limits leverage access for smaller accounts and prevents retail investors from overtrading on borrowed money. Remove that constraint and you expand margin capacity to millions of accounts that previously couldn't access it.

Increased margin capacity combined with reduced disclosure frequency creates dangerous dynamics. Marginal companies IPO with annual reporting schedules, which means the next earnings report could be six months away, maybe a year. Retail investors pile in on margin chasing the growth story, the narrative takes hold, and the stock runs. Nobody's scrutinising unit economics because there's nothing to scrutinise yet, just a compelling story and an extended runway before the next disclosure.

Then a correction happens. It doesn't need to be large, just a five or ten per cent pullback. But for accounts on margin, that's enough to trigger forced liquidations. Margin calls create selling pressure. Selling pressure accelerates the decline. The cascade feeds on itself.

This is how personal bankruptcies happen. Not from cash equity losses, but from leverage unwinding faster than investors can react. Overleveraging was part of the dotcom story, and if those dynamics resurface here, this cycle could start resembling dotcom in ways the market isn't currently pricing in. If most retail becomes over-leveraged in under-scrutinised companies, the wealth destruction becomes more acute.

The Last Ingredients

The concern isn't that loosening reporting requirements is inherently bad policy. There are legitimate arguments for giving companies more flexibility. The concern is timing and interaction effects.

Implementing these changes at the peak of an AI hype cycle while simultaneously removing leverage constraints creates conditions that have historically preceded bubbles. Less transparency, easier leverage access, a flood of marginal companies going public. We've seen this pattern before.

The risk is particularly acute for younger investors who are already dealing with housing unaffordability and wage stagnation. If this demographic over-levers into marginal AI IPOs that subsequently collapse, and if this coincides with an economic downturn, you're not just talking about a market correction. You're talking about broader financial stress with real economic consequences.

Regulatory changes don't happen in isolation. They interact with market cycles, capital access patterns, and investor behaviour. Atkins' proposal might be sound in theory, but in the current environment, it could amplify dynamics that are already concerning.

The ingredients for a problematic cycle are assembling. Whether they actually combine into something systemically dangerous depends on implementation details, market timing, and investor discipline. But if what many already consider an irrational market receives another wave of deregulation in the spirit of Alan Greenspan, we may finally see the decisive bubble dynamics of the dotcom era or the financial crisis that have so far been absent from this cycle materialise.