Company Interview / ETFs, AI and earnings shocks

Key points:

Earnings season has seen exceptional volatility, especially in large-cap stocks Proliferation of passive investing and shorter holding periods contribute to sharp moves Medpace (NASDAQ:MEDP) saw a 50% spike after a surprise positive result Major software firms including Adobe (NASDAQ:ADBE), Salesforce.com (NYSE:CRM), and Atlassian (ASX:TEAM) punished for minor earnings misses Long-term focus and risk management remain vital for investors

Michael Poulsen from Canopy Investors states that this earnings season marks one of the most volatile periods in recent memory across both the Australian and US markets. He points to significantly larger share price swings, with S&P 500 constituents experiencing average post-results moves surpassing 5%. Poulsen attributes this heightened volatility to the proliferation of passive investing and ETFs, which now outnumber individual stocks in the US. He notes that this dynamic forces active investors to absorb earnings surprises, contributing to sharp price action. Additionally, shorter investor time horizons and the growth of algorithmic and retail trading, often with leverage, have increased market choppiness.

Poulsen highlights contrasting reactions among US-listed companies during the season. Medpace (NASDAQ:MEDP), a founder-led healthcare services provider specialising in clinical trial management, experienced a remarkable 50% share price surge after reporting a positive earnings surprise following prior declines due to reduced client funding. Conversely, giants such as Adobe (NASDAQ:ADBE), Salesforce.com (NYSE:CRM), and Atlassian (ASX:TEAM) have suffered outsized negative moves on earnings misses, fuelled by concerns over the impact of AI on the software sector. Poulsen expresses scepticism about these narratives, seeing opportunity in vertically focused software firms instead.

Looking ahead, Poulsen views these factors as structural, suggesting that heightened volatility is now the norm. He advocates for investors to stay resilient, avoid overusing leverage, and maintain a disciplined long-term approach.