Finding opportunity in Australia’s mixed results

Buy Now and Earn Later

The August 2025 reporting season delivered a striking paradox that defines today’s Australian equity market. Despite a mixed reporting season, and earnings downgrades outpacing upgrades by 3:1, the ASX breached 9,000 for the first time, creating a textbook case of markets pricing in tomorrow’s earnings at today’s premiums. With the ASX300 trading above 21x forward earnings, at the upper bounds of its 20-year range, while cementing a third consecutive year of negative earnings growth, we’re witnessing something of a triumph of expectation over reality to date. That said, there were some emerging glimmers of hope including stronger commodity prices supporting the outlook for resources should they be maintained, and some positive trading updates from select domestic consumer housing names providing some evidence that recent rate cuts are supporting a potentially improved outlook – two positives we have not been able to point to in this cycle to date.

While we see some emerging green shoots in parts of the market, the reality to date has been weaker than expected earnings growth, paired somewhat counterintuitively with surging markets. This divergence demands careful navigation. While markets are seemingly consistently moving higher month on month, (driven by a strong US market with expectations of rate cuts, fiscal stimulus, and a strong technology sector), beneath the surface lies unprecedented turbulence, with 46% of stocks experiencing +/-5% moves on results day—double the historical average. The market’s hypersensitivity to earnings disappointments (-6.2% average reaction) versus modest rewards for beats (+2.9%) is likely a symptom of the very elevated valuation starting position for stocks entering this reporting season and signals an environment where strong stock selection has never been more critical. Get earnings wrong and you will get punished, now more than ever.

The companies that navigated this reporting season successfully share common threads: resilient business models, idiosyncratic growth stories apart from macro drivers, often conservative guidance, and strong management teams that under promised and overdelivered, resulting in earnings upgrades. 

It has also been important to understand the underlying state of the domestic and global consumer and evolving industry dynamics. In the analysis that follows, we examine the sector dynamics driving this bifurcation and highlight our conviction picks positioned to benefit as the market’s focus inevitably shifts from sentiment to substance.

August 2025: The most volatile reporting season in recent history

A third year of negative EPS growth for the ASX200

The August 2025 reporting season delivered familiar disappointment, with consensus earnings expectations for 2025 and 2026 revised lower by 1-2% over the past month. Consensus now projects 6.1% and 8.5% earnings growth for FY26 and FY27 respectively—forecasts that are a marked change in expectation from recent experience. Whether this is optimistic or realistic remains to be seen, however it likely requires some of the early positive indicators we observed to not only hold but build through the year.

Sector performance revealed stark divergences. Insurance, Banks and Real Estate emerged as relative outperformers, demonstrating the strongest breadth in earnings revision upgrades and suggesting defensive characteristics remain valued in this environment. Conversely, the broader Industrials sector endured its weakest reporting period since the pandemic, with the most material downgrades for global cyclical businesses exposed to the US market struggling with tariff uncertainty.

August 2025: Another reporting season of downgrades

Revenue Weakness Drives a focus on cost control

The fundamental story remains challenging. Revenue misses outpaced beats by more than 2:1 (31% vs 15%), reflecting some ongoing demand weakness in the economy. However, management teams are at least responding with operational discipline: 39% of companies beat EPS forecasts despite top-line pressure, while a record 47% discussed cost efficiency initiatives during earnings calls. A record 41% of companies addressed artificial intelligence initiatives, that are expected to eventually evolve into true cost/productivity gains in time.

A few positive exceptions include companies like Life360 (ASX: 360), ResMed (ASX: RMD), and Ansell (ASX: ANN), all demonstrating genuine pricing power, which enables them to invest for future growth while also returning capital to shareholders, & hence deserve a space in our portfolios.

Despite some overall earning weakness at least companies are returning excess capital to shareholders through buybacks (a record $6.5bn was announced in August alone!) and dividends.

Domestic Consumer Resilience Trumps Global Exposure

Companies with significant global exposure, particularly to US markets, encountered headwinds from trade policy uncertainty, weakening consumer confidence, and elevated bond yields. For example, US housing weakness impacted James Hardie’s (ASX: JHX) fibre cement demand and pressured Reece (ASX: REH) and Reliance Worldwide Corporation’s (ASX: RWC) plumbing product sales.

Conversely, domestically focused operators benefited from the improving local interest rate outlook and consumer resilience. Many companies are talking about the domestic consumer moving from resilient to improving. Discretionary retailers with housing and electronics exposure, including JB Hi-Fi (ASX: JBH) and Wesfarmers (ASX: WES), demonstrated strength as value-conscious consumers showed renewed spending propensity amid rising real incomes. Australian airliner, Qantas (ASX: QAN) also reported strong FY25 results with Jetstar and Loyalty the driving growth engines. In our view, the airline’s integrated QF/JQ portfolio and new fleet technologies position it well for continued domestic strength, despite increased capex guidance.

Geographic Performance Divergence

Healthcare: Selective Opportunities Amid Sector Challenges

While US healthcare regulatory concerns (tariffs & most favour nation pricing) together with pricing pressures from increased competition, cost of living pressures and regulation affected CSL (ASX: CSL), Sonic Healthcare (ASX: SHL), and Cochlear (ASX: COH), standout performers emerged. ResMed (ASX: RMD) capitalised on increased sleep apnea awareness, new product launches and Philips’ product recall to deliver strong operational results with expanding margins.

Ansell demonstrated exceptional pricing power, with management confirming full offset capability for tariff impacts through strategic price increases. The risk is volume impacts through both lower demand and market share shifts, but we expect Ansell (ASX: ANN) to be a net beneficiary through this process.

Idiosyncratic opportunities within sectors

Australian Real Estate – Cautious green shoots

The RBA’s eleven consecutive rate increases between May 2022 and November 2023 precipitated significant capital market disruption and asset value compression for the Australian Real Estate sector. Current indicators suggest asset values have reached trough levels, with early signs of capitalisation rate compression driving renewed capital allocation to the sector. Limited new supply due to elevated construction costs, combined with sustained demand fundamentals, supports this constructive outlook.

Charter Hall (ASX: CHC) pointed to an upward turn in the property cycle with easing construction costs, while GPT Group (ASX: GPT) delivered solid like-for-like growth across all segments. GPT’s diversified portfolio across major asset classes should outperform peers as occupancy trends strengthen.

Resources – Is the great rotation here?

Commodity producers endured their 7th consecutive reporting period of downgrades, driven by cost inflation and weakening Chinese demand. Yet investors, seeking rotation opportunities from the relatively more expensive financials and some industrials, focused on improving potentially positive news flow out of China, and spot commodity dynamics that signal potential earnings upgrades ahead.

The commodity complex presents mixed signals: gold benefits from US dollar diversification trends, iron ore reflects Chinese export strength offsetting domestic weakness, and lithium rallied sharply following unexpected Chinese mine closures. Rare earth elements gained momentum from US Department of Defence supply chain initiatives amid ongoing trade tensions.

While we remain underweight metals and mining overall until concrete earnings upgrades materialise, we are now relatively neutral both gold and iron ore exposures. Our preference for Newmont (ASX: NEM) continues following another strong result (although we remain neutral the gold sector overall), while we favour BHP (ASX: BHP) over RIO (ASX: RIO) given BHP’s balanced approach to capital allocation, and business mix.

Conclusion

The August 2025 reporting season was the outcome of an ongoing uncertain global macro environment and broad revenue pressures, combined with elevated valuations that reflected an expectation of a vastly improved outlook that in most cases is yet to appear.

That said, despite the high level of daily share price volatility, directionally at least, the major moves in reporting season reflected actual earnings outcomes – downgrades lead to underperformance, and upgrades outperformance. Large sections of the market either continued to hold up well earnings wise (banks, insurers), showed signs of a better earnings outlook to come (domestic cyclicals), or are coming closer to earnings upgrades after years of downgrades (parts of commodities). This gives some hope of market resilience.

We are focussed on high quality businesses that are well positioned for the current environment, and most importantly have the potential for earning upgrades. This played out positively once again for the fund during this reporting season. We acknowledge however that market multiples currently provide minimal downside protection if you get it wrong. Risks including tariff-driven inflation, Federal Reserve policy complications, geopolitical tensions, and potential US employment deterioration warrant careful monitoring. In this environment of asymmetric risk profiles, we are particularly focussed on avoiding highly valued stocks, or low-quality companies, with earnings risks.

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