What to learn from the recent earning season

While the events of the weekend are a substantial distraction, the recent reporting season holds some important lessons for all investors and behind every lesson is the specter of Artificial Intelligence.

Firstly, this reporting season, more than any other that I’ve seen, was dominated by volatile trading with the market quickly giving results either a thumbs up or savage thumbs down within hours of the release of profit results.

This was accelerated by the impact of AI on trading itself.  Various trading programs, spurred by AI technology, are now pre-programmed to immediately react to certain words within reports and implement trades accordingly.

This ‘superficial’ trading caused sudden falls in the share price of AMP, Cochlear and Promedicus, all good companies, all traded down between 25 and 30 per cent in a knee jerk response to their earnings reports. All three have struggled to recover this ground since.

Across all sectors, companies are now scrambling to make sure key words appear in their market reports to minimize the impact of these automated trading mechanisms. There will be a lot more of this.

Secondly, the prospect of Artificial Intelligence and the way it is transforming so many workplaces, is quickly dividing companies into winners and losers based on whether they can take advantage of AI. The winners being those embracing AI and the losers being those whose underlying businesses are threatened by AI.

The Commonwealth Bank was rewarded by seemingly embracing AI technology, and as part of its results announced among other tec initiatives, it was training its staff to take better advantage of AI efficiencies. Other big banks were also rewarded by announcing staff cutbacks largely due to AI driven efficiencies.

In contrast, Wistech Global announced a major pivoting of its business, cutting some 2,000 jobs from its global workforce but this didn’t stop the market deciding it was on the wrong side of the AI revolution.

The accounting software company Xero started on the list of companies that viewed AI as an opportunity, only for the market to determine they were on the wrong side of the ledger. Its share price has nosedived 60 per cent in the past year largely due to this negative sentiment.

So the final lesson is that the share market can be ruthless in reacting when it believes management have not got their response right to AI and this will continue for several years as this new technology is better understood and implemented.