2026 Australian Reporting Season - The Great Divide

Our Australian equity experts unpack what really defined this reporting season. From the structural growth stories still building momentum to consumer-exposed sectors turning cautious, our portfolio managers, Paul Taylor, Sam Heithersay and James Abela explain why guidance mattered more than profits, and where they’re finding opportunity as Australia’s two-speed economy becomes harder to ignore.

Our investment team discuss:

• Why dispersion is growing across the Australian market, with stark differences emerging between sectors and individual companies.
• Where capital is flowing, from AI infrastructure and resources to quality businesses offering earnings resilience and certainty.
• What separates the winners from the losers, including management quality, margin resilience and capital discipline in a tougher environment.
• Where the team is finding opportunities, as volatility and changing valuations create openings across technology, property, resources and consumer stocks.

For more key takeaways from the August reporting season, please visit our website. 

Edited transcript

Lukasz de Pourbaix (LDP): What are some of your observations from the recent reporting season?

Paul Taylor (PT): It’s been another interesting reporting season with a big spread of results. In the results themselves, we’ve seen some management teams perform better than others, some companies perform better than others, and some with better positioning. I think that's what we see in the results themselves.

Some sectors were clear standouts. Thanks to better commodity prices, the resources sector experienced a tailwind. Insurance is also doing well. On the flip side, there is a perception that it’s going to be tougher on the consumer moving forward with higher interest rates and potential higher taxes which leads to a tougher environment.

This is why we are very much believers in the bottom-up focus on the individual companies because despite a challenging environment, some companies have continued to perform well.

Sam Heithersay (SH): We saw a lot of dispersion at the stock level as Paul said, and a lot of that reflected more on the outlook than the result that's just been.

At a sector level, it's very clear that we have seen a greater dispersion between resources being stronger perhaps to the detriment of the banks and the consumer. You can see that in EPS (earnings per share) growth, which in FY26 was about 11.6% but if you took out resources, it's closer to 5.3%. This hints at the two-speed economy that we're seeing. Companies with more exposure to global themes such as AI data centre build outs in resources are doing quite well, but those exposed to headwinds on the consumer side are struggling, leading to that dispersion in EPS growth.

We saw that play out in what was otherwise quite a benign reporting season. The ASX 200 was still up, and we still saw more beats than misses, but I think that that kind of aggregate performance probably understates the dispersion that we saw at sector level.

James Abela (JA): We saw similar trends across mid-caps. In resources, EPS growth is around 30% this year, which is a huge driver of the small- and mid-cap market. Outside of that, it’s single digits growth.

As has been mentioned, the consumer is doing it tough and that’s apparent in individual pockets of companies. Alas, some healthcare names and some consumer names did well.

LDP: James, given you are looking across both markets, how does this compare to global trends?

JA: The AI space has been huge. Data centre companies had really good results generally which we saw in the likes of Megaport (ASX: MP1), NextDC (ASX: NXT) and Superloop (ASX: SLC) and that's been very positive on the global side. Resources like gold and copper were also very strong.

I think you want to be exposed to more global themes and less to domestic themes, given the domestic negatives in inflation, interest rates, oil prices, and budget changes, which have created tougher economics for consumers.

In AI, investors are not willing to pay duration anymore, so the long bond yield is going up. Price to earnings (PE) are coming down because the visibility and duration of time has created uncertainty. Whether it's a consumer brand or whether it's a process that's unique, AI can erode that more quickly than it could 10 years ago, therefore I think duration is one thing that the market's much more sceptical to pay for.

LDP: What were the biggest surprises this reporting season?

PT: The thing that I've found interesting was the M&A (merger and acquisition) activity. I think this reflects that perhaps companies with good value have been forgotten and reflects the value we are seeing in the market.

JA: We've seen more than 10 takeovers, with a significant number occurring in the resources sector. Beyond resources, there have also been notable transactions in other industries, including the acquisition of Steadfast Group (ASX: SDF) by a US-led consortium in the insurance sector.

The M&A activity has also reflected the appeal of the HALO strategy, which focuses on Heavy Assets, Low Obsolescence businesses. Examples include Cube, which was acquired by Macquarie Asset Management, and Atlas Arteria, which was taken over by IFM.

More broadly, deal activity has been driven by a combination of infrastructure-like characteristics, scale benefits and attractive valuations. Companies with stable cash flows can be particularly appealing to private equity firms and offshore buyers that can enhance returns through leverage. In many cases, these businesses have been somewhat overlooked by the market, creating compelling value opportunities.

SH: As much as we've been talking about the consumer and the weaker outlook brought about by higher rates and budget changes, there were still pockets of growth in the K-shaped economy. A surprising revelation was in consumer spending data for July, which proved to be far greater than consensus expectations, and we certainly saw that in some companies we talked to.

Woolworths (ASX: WOW) delivered a strong result, with like-for-like sales up more than 5% during the half and 7.6% since the start of the year, helped in part by its successful Ooshie promotion. More broadly, reporting season highlighted pockets of resilience across several sectors, despite ongoing pressure on consumer spending.

One of the more surprising insights came from conversations with Woolworths and Coles (ASX: COL) was around the impact of GLP-1 weight-loss drugs. Both retailers are seeing changes in purchasing behaviour, with consumers buying less in higher-calorie food categories and spending more on areas such as beauty. As a result, the overall sales impact appears to be broadly neutral, which was an unexpected takeaway.

PT: To add to this, it was interesting to hear from management teams around the e-commerce as well. They're growing very rapidly in that area thanks to online deliveries, another beneficiary of AI and logistics automation, and a response to consumer demand.

LDP: What are your observations on how companies are looking ahead?

SH: We saw stocks move more on guidance and outlook than on the results themselves. On average, FY27 earnings expectations were revised down by around 2%, and we saw several cases where companies delivered strong FY26 results but were punished because their outlook fell short of market expectations.

CSL (ASX: CSL) and WiseTech (ASX: WTC) provided two stark examples. CSL had been under pressure for much of the year, yet an acceptable result coupled with encouraging FY27 guidance saw the stock rally around 17% on the day. In contrast, WiseTech delivered a strong FY26 result, but slightly weaker-than-expected revenue guidance led the shares to fall around 14%. It reinforced the message that strong historical performance alone was not enough, and companies needed to demonstrate a stronger outlook.

The increased focus on guidance reflects the heightened level of uncertainty facing businesses and investors. Global factors, including the interest rate environment and geopolitical tensions, as well as domestic influences such as the Federal Budget, have made forecasting more challenging. As a result, many companies adopted a more cautious stance when providing outlook statements, and in some cases the market reacted negatively.

Ultimately, guidance tells investors more about the future than the past. 

Because share prices are driven by expectations of future cash flows, markets are naturally more focused on what lies ahead. That dynamic was especially evident this reporting season, with guidance proving far more influential than the results themselves.

LDP: Where are you seeing capital flow currently?

In the current environment, capital is gravitating towards assets with tangible value and greater certainty. Investors, management teams and consumers have all become more cautious, which means the market is placing a higher premium on businesses that can deliver earnings growth and cash flow today rather than promising outcomes five or ten years down the track.

We're seeing strong capital flows into hard assets, value-oriented businesses, yield-generating investments and sectors where earnings visibility is high. Areas such as resources and AI have been rewarded because they are delivering growth now, whereas companies relying on distant future growth are finding it harder to attract investor support.

At the same time, investors remain willing to back high-quality, long-duration businesses where competitive advantages are difficult to replicate. 

Fisher & Paykel Healthcare (ASX: FPH) is a good example. It operates in a highly specialised market for respiratory and critical care equipment, where innovation, research capability and regulatory barriers create a durable competitive position that cannot easily be displaced, including by AI.

Ultimately, capital is flowing towards businesses that offer one or more of three attributes: certainty, quality or yield. Whether through hard assets, strong cash generation, near-term earnings growth or unique long-term competitive advantages, investors are rewarding companies that can provide confidence in an increasingly uncertain world. Businesses that lack these characteristics are finding it much harder to command premium valuations.

SH: In large caps, one of the biggest questions investors are asking is whether a company will be an AI winner or an AI loser. That distinction is increasingly influencing valuations. Businesses perceived to be at risk from AI are seeing the market question the durability of their earnings and, as a result, investors are less willing to pay high multiples. Conversely, companies positioned to benefit from AI are attracting capital and outperforming.

What's becoming increasingly clear is that the AI investment theme has moved beyond software and algorithms and into the physical economy. 

There is now around a trillion dollars being directed towards data centre infrastructure globally, making AI one of the largest infrastructure build-outs in the world today. As a result, capital is flowing into the businesses supplying the physical assets needed to support that build-out.

In Australia, resources companies are among the clearest beneficiaries. Miners are effectively the "picks and shovels" providers for the AI boom, particularly those with exposure to copper, which is critical for data centres and the electricity networks that support them. While AI-related demand still represents a relatively small portion of the total copper market, it is growing rapidly, and investors are increasingly focused on that long-term growth opportunity.

We're also seeing this theme play out in companies such as Goodman Group (ASX: GMG), where data centres now account for the vast majority of its development pipeline. The market is rewarding businesses with direct exposure to this infrastructure build-out because the spending is no longer theoretical; it is already showing up in earnings, order books and project pipelines.

More broadly, capital is flowing away from companies where AI creates uncertainty around future earnings and towards businesses with clear exposure to the investment cycle it is driving. The conversation has shifted from algorithms to atoms. Investors are no longer just debating the implications of the latest AI model; they are increasingly focused on the raw materials, infrastructure and physical assets required to make AI possible. That's where a growing share of capital is being deployed today.

PT: We're also seeing capital flow towards companies that demonstrate disciplined capital allocation. The key question is what companies do with the profits they're generating. If management is allocating capital sensibly, maintaining balance sheet discipline and returning excess cash to shareholders, the market is generally prepared to reward that behaviour with higher valuations.

LDP: Another big theme has been this higher-for-longer interest rate environment, alongside tax changes and a softer property market. What flow-on effects are you seeing from these factors, and where are you seeing the biggest impacts across the economy and markets?

JA: There are several macro factors weighing on confidence including inflation, interest rates, geopolitical uncertainty, oil prices and recent budget changes. We've already seen this play out in markets such as Canada and New Zealand, and we're starting to see similar trends emerge in Australia. Overall, confidence remains subdued and economic activity is likely to soften.

For investors, one of the most important implications is the impact on the banking sector. As confidence weakens, credit growth typically begins to slow. That's significant because housing remains the cornerstone of the Australian economy, with around $12 trillion in residential property underpinning household wealth and lending activity.

Given the importance of housing to economic growth and bank profitability, it's worth bringing Sam and Paul into the conversation to discuss what a slower credit growth environment could mean for the major banks and the broader market.

SH: This was a key theme during reporting season, particularly as we heard from the major banks and gauged their response to the Budget. Most banks adopted a more cautious outlook, forecasting a 15-20% decline in mortgage applications and lowering their expectations for housing credit growth.

Forecasts that were previously around 7.5% growth for FY26 have been revised down significantly, with some expecting growth to slow to just 2.5% by FY27. That's a meaningful shift in the housing outlook and reflects the combined impact of recent interest rate rises and Budget measures.

The challenge for the RBA is that the economy increasingly appears to be operating at two speeds. On one hand, there is strong activity linked to global themes such as AI infrastructure and data centre investment. On the other, there is a more subdued domestic economy, where households are feeling the effects of higher rates and weaker confidence.

If the RBA needs to slow economic activity further, it may end up placing more pressure on consumers and other interest rate-sensitive parts of the economy, while having less influence over the investment spending being driven by global AI-related demand. That creates a more complex policy environment, as traditional monetary tools may not be as effective when powerful offshore investment trends are driving growth.

This is one of the key implications of a two-speed economy and a theme we're likely to see play out over the remainder of the year. Markets have already started to reflect that uncertainty, with expectations of another rate rise increasing and pricing suggesting a growing likelihood of further tightening by year-end.

JA: I think this environment also places a much greater focus on margin management and management quality. It goes back to an earlier point about backing experienced leadership teams. Companies whose management teams have successfully navigated previous cycles are generally better equipped to manage through periods of uncertainty and are therefore more likely to command higher valuation multiples.

We're seeing that play out clearly in the property sector. Companies with higher levels of debt have come under significant pressure as investors become increasingly concerned about their balance sheets and their ability to manage through the cycle. By contrast, the sector leaders, which entered this period with stronger balance sheets and lessons learned from previous downturns, including the GFC, have held up relatively well.

More broadly, investors are becoming increasingly selective. They are rewarding companies that can protect margins, manage debt prudently and allocate capital effectively. As this cycle unfolds, margin management and financial discipline are likely to become even more important differentiators between the winners and losers.

LDP: Are there any key areas now where you have higher conviction in opportunities?

PT: If you look at the IT sector, there are some software companies that have been heavily sold off because the market views them as potential AI losers. For investors willing to do the work, that could create opportunities. If you identify a business with a stronger competitive moat than the market appreciates, and its share price has fallen significantly, there may be attractive value on offer.

Another area worth watching is property. Interest rates have remained higher for longer and, as we've discussed, there are early signs that the residential market is starting to cool. While that creates near-term challenges, it could also present a counter-cyclical investment opportunity. Property has historically been a strong long-term wealth creator in Australia, and periods of weakness can often provide attractive entry points for patient investors.

We also continue to see opportunities across the resources sector, although selectivity remains critical. The same applies more broadly across the market. We've highlighted the supermarket sector as an area we like, given its defensive characteristics, resilient earnings and ability to provide stable, long-term returns.

At the same time, if the consumer environment becomes more challenging, pockets of the consumer discretionary sector may become oversold. For investors prepared to look through the cycle, that could create opportunities to buy quality businesses at more attractive valuations.

SH: One theme we've been discussing is the need to broaden the definition of an AI winner beyond the obvious software names. There are a range of businesses that may benefit significantly from AI, even if they don't immediately screen as technology companies, whether that's insurers improving claims processing, supermarkets optimising inventory and automating distribution networks, or banks driving greater operational efficiency.

During this reporting season, we started to see companies put tangible numbers around those benefits. CBA highlighted measurable gains from its AI initiatives, while companies such as WiseTech also pointed to quantifiable improvements from their AI investments. That's an important shift, as the AI discussion is moving from a largely qualitative narrative to one that is increasingly backed by real financial outcomes.

Where we're particularly focused is identifying areas where the market may be underestimating the potential benefits. An insurer, for example, may not be the first company investors think of as an AI winner, yet there is significant scope for AI to improve productivity, reduce costs and enhance customer outcomes. Those are the types of opportunities that emerged through our company meetings and where we believe the market may still be overlooking the long-term potential.

JA: On the quality side, our preferred sectors remain healthcare, financials and technology. These businesses tend to have strong competitive advantages, resilient earnings streams and long-duration growth profiles. Importantly, many are also well positioned to benefit from AI or are less vulnerable to disruption from it, making them attractive long-term holdings.

From a momentum perspective, resources remain a standout. 

We continue to see positive earnings momentum across gold, copper and mining services, supported by strong commodity prices and ongoing demand linked to global infrastructure and AI-related investment. Given the multi-year nature of these themes, the backdrop remains favourable for selective exposure to the sector.

On the value side, there are still businesses generating attractive yields, strong cash flows and healthy balance sheets. These companies are often well established in their industries and continue to deliver solid shareholder returns despite a more uncertain economic environment.

Interestingly, many of these value-oriented businesses are also attracting takeover interest or private equity attention, highlighting the disconnect between their underlying value and current market pricing.

In the portfolio I run, I am looking for high-quality, long-duration businesses, sectors with strong earnings momentum, particularly in resources, and attractively valued companies with strong cash generation and balance sheet strength. That combination provides a balanced approach to navigating today's market while remaining well positioned for future opportunities.

LDP: What’s the one key takeaway for investors moving ahead?

PT: Many macro issues happen in the short term, but they tend to be much more sentiment based and that'll change the valuation metric, but obviously not necessarily the earnings profile. I think it's about remaining focussed on bottom-up company research and asking questions who has the best management team, the strongest business model and the ability to navigate a more challenging environment?

Tough periods often separate the strongest companies from the rest. 

Experienced management teams that have successfully navigated previous cycles are typically better equipped to manage costs, allocate capital effectively and adapt to changing market conditions. In many cases, they can use periods of uncertainty to strengthen their competitive position and emerge as even stronger market leaders.

Ultimately, reputations are earned during difficult times, not when a rising tide is lifting all boats.

SH: I think that we should be focusing on margin preservation in the next 6-12 months because a lot of companies have perhaps been flattered in their growth algorithm by a more supportive housing cycle or better rate environment. But it's going to be tougher from now on and we're going to have to look at how they preserve margins when the top line is perhaps not as resilient as it once was or is slowing.

As a bottom-up, fundamental shop, it's an exciting moment. When growth starts to slow, you get a clearer view into how a business is really being run. It allows us to assess whether management teams can pull the right levers to protect margins, allocate capital effectively and navigate a more challenging operating backdrop. It's a great moment to really test the resilience of a company if the top line is starting to slow and I'd be focused on margins.

JA: I’m focussing on duration and persistence - what's the duration and the persistency of the return on capital? I think of the famous quote ‘it's those that can adapt, that survive’. In this rapidly changing and volatile, those who can adapt, persist and give duration are going have a much better valuation over time and a much better business. That's really what I'd focus on right now.

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