Why Small-Mid Cap Funds Are Shifting Away from Insperity (NSP) Toward AI-Driven Growth in a Post-Trump Tariff Era

In the ever-shifting landscape of small- and mid-cap investing, fund managers are recalibrating their portfolios with a laser focus on resilience and scalability. The recent exodus from Insperity (NSP), a once-stable player in the HR-as-a-service sector, underscores a broader trend: capital is fleeing traditional service models and surging into AI-driven enterprises poised to capitalize on a post-Trump tariff environment. This reallocation is not merely a reaction to short-term volatility but a strategic pivot toward industries that align with the macroeconomic tailwinds of 2025.

The Insperity Dilemma: Earnings Pressure and Structural Challenges

Insperity's Q2 2025 earnings report was a wake-up call. The stock plummeted 15.3% following a 36.6% earnings-per-share miss and a net loss of $5 million, driven by soaring healthcare costs—particularly pharmacy expenses tied to high-cost drugs like GLP-1s. While the company's 99% client retention rate and $441 million in cash reserves remain strengths, its adjusted EBITDA guidance for 2025 was slashed by 51.5% to $170–$205 million. This downward revision, coupled with a 45.95% 52-week loss, has eroded investor confidence.

Historical patterns reinforce the gravity of this earnings miss. Over the past three years, NSP has consistently underperformed in the aftermath of earnings disappointments, with a 3-day average decline of -2.82%, a 10-day decline of -5.14%, and a 30-day decline of -6.77%. The stock has never posted a positive return within 30 days of an earnings miss, with the maximum observed return being -1.61% on day 28. These results highlight a structural vulnerability: NSP's share price lacks the resilience to recover from earnings-driven shocks, compounding the risks for investors.

The problem for Insperity is not just operational but structural. Its business model, built on predictable HR services for small businesses, is ill-suited to a world where margins are under pressure from inflationary forces and where investors demand exponential growth. As one hedge fund manager put it, “Insperity is a good company, but it's not a great investment in a world where capital is chasing AI-driven disruption.”

The AI Allure: Onshoring, Scalability, and Trump-Era Tailwinds

Meanwhile, small- and mid-cap funds are doubling down on AI-driven enterprises. The logic is compelling: Trump-era tariffs have accelerated onshoring, creating demand for automation and data-driven solutions. Companies that can streamline domestic manufacturing with AI—whether through predictive maintenance, supply chain optimization, or generative AI tools—are capturing market share and investor dollars.

Diamond Hill Capital's Small-Mid Cap Fund, for instance, has shifted its focus to AI stocks, citing “greater upside potential and lower downside risk” compared to Insperity. This move reflects a broader industry shift. Hedge funds holding NSP dropped from 21 to 25 in Q1 2025, but the stock's underperformance has not been matched by a surge in new buyers. Instead, capital is flowing into AI startups and established tech firms with clear onshoring synergies.

The calculus is simple: AI-driven companies can scale at a rate that traditional service providers cannot. For every $1 invested in an AI firm, the potential return is magnified by its ability to disrupt entire industries. Insperity, by contrast, is fighting to maintain a shrinking margin in a sector where cost pressures are relentless.

Strategic Reallocations: A Macro-Driven Rationale

The reallocation away from NSP is not arbitrary. It is rooted in macroeconomic realities:
1. Tariff-Driven Onshoring: Trump's 2024 re-election and subsequent tariffs on Chinese imports have forced U.S. manufacturers to adopt AI to offset labor costs. This has created a virtuous cycle—higher demand for automation, faster AI adoption, and stronger returns for tech firms.
2. Margin Compression in Services: Sectors like healthcare and HR services are grappling with inflationary pressures that erode profitability. For every dollar Insperity saves on operating expenses, it loses two in benefits costs.
3. AI's Scalability Premium: AI companies can achieve 50%+ gross margins in their core products, while service firms like Insperity are lucky to hit 20%. This margin gap is widening as AI tools become commoditized.

Investment Implications: Where to Allocate in 2025

For investors, the lesson is clear: capital must flow to where it can compound. Insperity's strategic pivot with Workday and its HRScale initiative may bear fruit in 2026, but the near-term outlook is bleak. Its stock trades at a 30% discount to historical P/E ratios, but this discount reflects the market's skepticism about its ability to navigate healthcare costs and macroeconomic headwinds.

Conversely, AI-driven small-cap firms—particularly those with onshoring ties—are trading at premium valuations, justified by their growth trajectories. For example, a robotics firm automating warehouse logistics has seen its revenue grow 80% year-over-year, with EBITDA margins expanding from 15% to 35%. Such companies are not just surviving the Trump-era tariff environment; they are thriving in it.

Conclusion: The New Paradigm for Small-Cap Investing

The shift away from Insperity is emblematic of a larger transformation. Small- and mid-cap funds are no longer content with defensive plays or stable but stagnant businesses. They are seeking out companies that can leverage AI to create unassailable moats in a world of rising costs and geopolitical uncertainty.

For Insperity, the path forward is fraught. Its 99% client retention rate is a testament to its value, but it is not enough to offset the drag of healthcare inflation. For investors, the message is equally clear: in a post-Trump tariff world, the future belongs to those who can code, automate, and scale. The capital is moving accordingly—and it won't wait for NSP to catch up.