Growth - the defining factor this reporting season

The FY25 reporting season has once again reinforced one of my long-held beliefs: in this market, growth remains the defining factor. The companies that delivered genuine revenue growth were rewarded, while those that disappointed were heavily punished. But growth alone is not enough. What the market now demands is that top-line growth ultimately translates into bottom-line earnings and margin expansion.

Shareholders want to see that the investments companies make in building scale, technology, or distribution eventually generate earnings power. That is where the real shareholder value lies.

The Case of Seek

A standout example this season was Seek (ASX: SEK). For years, Seek delivered consistent top-line expansion, but profitability lagged as management poured resources into new platforms and regional expansion. Investors tolerated this for a time, but patience was wearing thin. This reporting season changed the story: Seek’s top-line momentum finally came through in the bottom line. Earnings leveraged off prior investment and cost controls, and the market’s reaction was emphatic. This is the heart of what I mean by “growth into leverage”- when top line growth cascades into operating leverage and earnings growth, amplifying shareholder returns.

Divergences define the season

One of the most striking aspects of this reporting season was the wide dispersions in outcomes. Reactions were often dramatic: stocks up 10–20% in a day when results surprised positively, and down equally hard when they disappointed. In small and mid-caps, this was particularly evident across autos, retail, and resources, where optimism and fear combined to create outsized moves. Meanwhile, the large-cap space showed similar patterns.

The Coles (ASX: COL) vs Woolworths (ASX: WOW) dynamic was perhaps the clearest illustration. Coles delivered a clean FY25 result, edging past Woolworths in execution. Sales momentum remained strong, supported by efficiency gains in distribution and tight control on shrinkage, while cost management improved margins. By contrast, Woolworths fell behind on both sales growth and operational efficiency. The divergence demonstrates that even in staple-heavy sectors, company-specific execution is determining performance. This is no longer about supermarkets as a sector; it is about who is winning at both revenue and cost lines.

Banks vs resources

The rotation between banks and resources continues to be closely watched and is becoming one of the more intriguing themes of this reporting season. Banks have delivered solid results, buoyed by strong credit quality and supportive conditions. Historically, banks have tended to outperform during RBA rate cutting cycles, and with more cuts likely ahead, that remains a supportive backdrop. However, bank valuations now sit toward the expensive end of their ranges, raising questions about the sustainability of further upside.

Resources, by contrast, retain valuation support and multiple potential tailwinds. Investors are weighing the relative cheapness of the sector against banks’ premium pricing. Added to this is the possibility of further Chinese stimulus, which has historically provided demand-side support for bulk commodities and metals. On the supply side, lithium markets are tightening due to mine closures and reduced output, which supports pricing. IGO (ASX: IGO), while navigating a challenging transition year, still represents leverage to the long-term structural demand for battery materials.

Evolution Mining (ASX: EVN) delivered a solid FY25, with improved production levels coinciding with a stronger gold price, both of which underpinned earnings and supported share price gains. Gold’s strength is not only cyclical but also reflective of broader market dynamics, with investors seeking defensive exposure in uncertain times. Alongside rare earths and copper, this breadth of strength in resources suggests that fundamentals are in place for a recovery, even if previous attempts at sector rotation have faltered.

The market, in essence, is caught between two poles: banks, supported by credit quality but stretched on valuation, and resources, cheaper with real tailwinds but requiring confirmation that momentum can hold. This valuation discrepancy is one of the key dynamics investors are watching closely.

Consumer resilience

Despite cost-of-living pressures, the consumer proved far stronger than expected. Spending patterns have shifted, with households already adjusting behaviour in anticipation of lower rates. Discretionary categories have shown resilience, underpinned by Australia’s strong population growth, which supports demand even in challenging conditions. This resilience was a key reason to selectively add to consumer discretionary exposure as it is an area offering both cyclical upside and structural growth.

The role of AI

An important theme this reporting season was AI. Almost every company referenced it as a tool for cutting costs, enhancing productivity, and delivering better outcomes for customers and employees. Firms are still cautious in quantifying benefits, but the direction of travel is clear. AI is contributing to the market’s buoyant mood. We don’t yet know how significant the upside will be, but the probability is that it will be both positive and substantial. Many companies highlighted opportunities across compliance, HR, call centres, and customer service which signals the adoption curve is already underway.

Structural growth in tech

Technology remains the purest expression of the market’s hunger for growth. A clear example this reporting season was Wisetech (ASX: WTC). The company’s FY25 result was solid, though the share price reaction was muted due to cautious messaging. Yet the long-term story remains compelling. Wisetech continues to expand globally, capturing market share in logistics software, and the opportunities ahead in digitisation and automation of supply chains are vast. This underscores why Australian tech still offers structural growth potential, even when short-term sentiment wavers.

Healthcare struggles

The healthcare sector was a notable laggard. Private hospitals continue to struggle, with labour costs, particularly nursing staff, rising well ahead of revenue growth. Non-labour costs have also climbed, compressing margins further. The result is that many private hospitals are facing profitability challenges, a rare situation for an industry that has historically been resilient. The market’s reaction to CSL’s (ASX: CSL) weaker-than-expected result was similarly unforgiving, with a dramatic sell-off reflecting both cyclical and structural pressures. This is one area where the outlook is more challenged, and my view is bearish.

In contrast, insurers demonstrated resilience. Suncorp delivered a strong FY25 result, supported by continued premium growth and more benign claims outcomes. Its ability to balance underwriting discipline with cost control highlighted the strength of its business model in a tough environment. For investors, it served as a reminder that not all parts of the healthcare and insurance complex face the same pressures, and some insurers have tailwinds where providers struggle.

Valuation, momentum and opportunities

While growth dominated sentiment this season, valuation cannot be ignored. Quant-driven funds have amplified moves, buying indiscriminately on upgrades and selling heavily on disappointments. This creates volatility but also opportunity. While short-term moves are driven by momentum and growth signals, over the long run valuation always reasserts itself. These dislocations present opportunities for patient investors with a valuation discipline.

Portfolio positioning

In my portfolio, the response to reporting season has been measured. I have added to consumer discretionary names, where population growth and resilient spending provide confidence. I’ve modestly increased exposure to resources, particularly sub-segments with structural tailwinds like lithium and rare earths. At the same time, I’ve trimmed staples and some healthcare, reflecting both weaker growth and stretched valuations. Technology remains a core allocation, albeit quite small given the size of the sector in Australia.

Outlook

If I had to distil one key takeaway, it is this: growth is king, but growth must mature into operating leverage and earnings growth. Investors should focus on businesses that not only expand their top line but also demonstrate the discipline to convert that growth into earnings power. That’s what creates sustainable shareholder value. The divergences this reporting season, Coles vs Woolworths, Seek’s results, banks versus resources, one thing is clear: execution at the company level matters.

Managed Fund

Fidelity Australian Equities Fund

Australian Shares

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