NEWS + VIEWS – 29/08/2025
MARKETS
The prospect of interest rate cuts in the US is keeping investors and share markets buoyant with the ASX 200 index at record levels. The latest higher than expected inflation reading may give some pause for thought.
Domestic share markets are trading at elevated multiples. Goldman Sachs estimate that the current average price to earnings ratio is 19.7 times or 34% above the historical average, which is in the face of underwhelming company earnings and forecasts. Earnings need to ‘catch up’ to maintain share price upward momentum.
US markets have been resilient as potential interest rate cuts are built into investor expectations. The chart below shows that the VIX index (sometimes referred to as the ‘Fear Index’) is at low levels, which indicates that investors are confident of more share market rises in the next few months.
PROFIT REPORTING SEASON
The company profit reporting season is well underway. Swings of 5% or more either way in share prices have been unusually frequent. The share price of any company that hasn’t at least met forecast profits has been severely punished. Notable examples are CSL, James Hardie (JHX) and Woolworths (WOW). Commonwealth Bank (CBA) was also punished for not exceeding expectations but the sell-off has been less severe.
Cost cutting has been the theme for companies that are reporting above expected earnings (e.g. Telstra (TLS) and Transurban (TCL)). However, that can last only so long and eventually increased revenue is needed to underpin profits.
The big misses
CSL, WOW, Sonic Healthcare (SHL) and James Hardie (JHX) were punished harshly. CSL’s result was reasonable (perhaps slightly missing) but investors hated the soft guidance (mid-point of forecast of around 7-10% profit growth) and the unexpected plans to cut staff by 3,000. CSL also announced the spinning out of the Seqirus vaccine business into a separate entity. The benefits of the demerger were not particularly well explained, and investors didn’t wait to find out as the share price fell by more than -20%.
JHX’s fall in share price was much easier to understand as its results were well below expectations and forecasts not particularly robust. JHX was also coming off a less than welcome $14 billion acquisition of a US decking company. Its share price was walloped by -30% on the day of reporting and continued down another -10% the following day.
SHL’s profit was weaker and below expectations for revenue, earnings, and profit. SHL is influenced by government set rebates for pathology and radiology. The share price has been sold off over -16%.
Bank earnings robust
Despite CBA delivering a decent result, its share price was promptly sold off because investors wanted more. However, it has since recovered some of its losses. NAB announced a very solid quarterly trading update with the all-important business lending up 4%. The results were nicely rounded out with home loans up 2%, deposits up 6% and Net Interest Margin up 4%. The share price has responded nicely. A $130 million pay remediation charge was a negative, which is the second time around for NAB but it would seem nobody can navigate the complex pay rules in this country.
Westpac (WBC) also added to the positive sentiment around the banks. The upward spiral of WBC’s and ANZ’s share prices matches that of NAB.
Infrastructure positive
TCL and APA Group (APA) were among the winners with solid profits and positive earnings outlooks. Investors are seeing infrastructure as a providing some protection to downside risks as revenues tend to hold up better for these types of companies in an economic downturn.
Supermarkets very different
The major supermarket results were like ‘chalk and cheese’. Coles Group (COL) lifted sales by 3.6% and adjusted profit in turn was up 3.6%. What excited investors was the 4.9% increase in sales for the first eight weeks of FY 2026. Consequently, the share price has jumped 11% in the two days following the result. WOW on the other hand is trailing COL’s supermarket revenue growth and BIG W is holding it back. WOW’s share price plunged circa -15% on the results announcement.
Resource giants OK
BHP is gradually reducing its reliance on iron ore, increasing its exposure to copper and potash. Nevertheless, it is globally a very low-cost producer of iron ore. Potash and copper developments are slated as key growth prospects for BHP. Management are leading business warnings to Australian politicians that industrial relations and tax rises are making investment in Australia much harder.
Woodside Energy (WDS) echoed BHP’s warnings on Australian investment and is also vocal on the time it takes governments to approve projects such as the North West Shelf expansion. Management delivered an ‘as expected’ result albeit down from the previous year. Revenues were higher but depreciation and restoration expenses rose. The result was reasonably well received.
Wesfarmers (WES) gift
WES reported growth in both sales and profit for the full year, despite what it described as a challenging trading environment. Revenue rose 3.4% while net profit after tax jumped 14.4%. Bunnings’ sales improved 3.3% while Kmart saw revenue increase by 3.4%.
Chairman Michael Chaney will be succeeded next year by former BHP chairman Ken MacKenzie. Due to higher profits and the sale of Coregas to Nippon Sanso for $770 million earlier this year, WES will pay a dividend of $1.11 per share and the company also flagged a special distribution of $1.50 per share. If approved, shareholders are expected to receive this payment in December.
Gerard O’Shaughnessy
P 0423 771 330
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