By Hailey Kim, Senior Investment Analyst, Wilson Asset Management
August reporting season was broadly solid, but it was not a story of strong underlying growth. Results were generally around or ahead of expectations, helped by margins and cost control, while commentary on the year ahead was more cautious. This led to heightened volatility in share prices, as markets assessed both earnings and the outlook against what had already been priced in.
The starting point mattered
Expectations had already come down ahead of reporting season, partly reflecting increased uncertainty from the Middle East conflict and a more cautious earnings outlook across some sectors. This meant the hurdle for companies to deliver a positive surprise was lower than it might otherwise have been.
Companies that had entered reporting season with depressed share prices saw some of the strongest relief rallies. Healthcare was a good example. The sector had significantly derated into results on concerns that ultimately proved overdone, and the ‘better than feared’ reaction told us more about how far sentiment had drifted from fundamentals than about any material improvement in the outlook. Real Estate Investment Trusts (REITs) were another example, particularly residential exposed names like Stockland and Mirvac, which were sold down hard on higher for longer cap rate concerns. Results suggested those concerns were less severe than the share prices had implied and both stocks were rewarded accordingly.
The outlook mattered more than the result
Reported earnings were generally resilient, but this was often achieved through better margins, productivity and cost control rather than underlying revenue growth. Looking ahead, management teams were more cautious, particularly across rate sensitive parts of the domestic economy. Housing and parts of the retail sector showed some signs of slowing, while banks pointed to softer mortgage demand and a more conservative outlook on credit growth into the next financial year.
This made the revenue outlook increasingly important. The question was not simply which stocks looked cheap, but which represented genuine value and which risked becoming value traps as growth slowed. This was also part of a broader shift towards value in global markets as expectations around growth, inflation, and interest rates continue to evolve.
Growth is becoming more selective
The stronger earnings growth came from areas supported by structural investment rather than the domestic cycle. Infrastructure, defence and data centres are benefitting from government investment and AI infrastructure build out. Businesses with meaningful US exposure are also seeing a more resilient consumer backdrop than many domestic cyclicals.
This divergence is occurring against a more complicated interest rate backdrop. In Australia, inflation is proving slower to return to target, while the effects of restrictive monetary policy continue to flow through households, housing and credit. While another near-term rate increase remains a possibility, we believe further evidence of slowing domestic demand would ultimately shift the balance back towards easing next year, providing some offset to the rate sensitive part of the markets. Offshore, the US economy and consumer remain relatively resilient, although the outlook for inflation and interest rates continues to evolve.
The outlook coming out of reporting season is therefore one of greater dispersion rather than a clear change in direction for the market as a whole. While some areas are facing softer conditions, others continue to benefit from structural demand and strong investment. As the global macro backdrop continues to develop, the focus now turns to how these changing conditions feed through into earnings and valuations. This divergence will continue to create both opportunities and risks across the market.
