Earnings Season on Steroids — How to Handle the Volatility

In a simpler time, earnings season used to be a time of great joy for investors. Companies would open up their books, important information would be shared, and informed and rational decisions could then be made on the trajectory of your portfolio.

Those days, it seems, appear to be long gone.

Chaos reigns

These days, earnings season is unrecognizable. Companies still report their finances, but the rational decisions of old appear to be gone. Meta, DraftKings, Roku — all of these companies saw over 20% of their value wiped out following earnings calls that missed expectations. Conversely, Upstart, Peloton, and Chegg all saw their shares skyrocket after reporting good news. 

When we dig deeper, some of these swings do seem a little justified. Upstart, for example, had been falling from all-time highs since October. Its comprehensive demolishing of analyst estimates saw its stock soar by almost 40%. On the other side, Meta had to reveal slowing user growth, increased competition from TikTok, and major advertising headwinds from Apple’s now infamous iOS 14.5 update. A 20% slide could almost be justified.

And that right there is the issue — the sheer magnitude of these peaks and troughs.

A 20% fall or rise should indicate a significant change in the underlying thesis of a company. That’s just not what we’re seeing, however. As long-term buy-and-hold investors, this pattern can be extremely disconcerting. You’re watching blue-chip companies you’ve planned on holding for years trade like penny stocks.

Like all things, however, this volatility shall pass. Don’t get caught up in the day-to-day swings that are occurring right now. If you see a company dip or rise suddenly, check for news, understand what’s happening, and examine the underlying thesis for the business. If that hasn’t changed and investors are simply panicking, hold firm and remember your horizon.