Earnings Reports Bring Relief, But Skepticism Remains

Corporate Australia’s reporting season for the first half of CY26 has wrapped up, and the numbers were fine — but few believed them. Across 190 companies, the focus wasn’t on past performance but on future guidance. Boards are nervous: earnings downgrades outpace upgrades for FY27, and the consumer is softening. This unease reflects a broader shift in market sentiment, where investors are increasingly scrutinizing forward-looking statements rather than historical results.

Despite this, beaten-down stocks rallied, though not all moves were backed by solid earnings. Many were simply relief rallies, as results weren’t as bad as feared. This distinction matters, as it’s easy to mistake a relief bounce for a genuine turnaround. The market’s reaction highlights the tension between short-term optimism and long-term uncertainty, with investors grasping at any positive news amid a cautious outlook.

Earnings growth hides sector disparities

ASX 300 earnings for FY26 are tracking 12% year-over-year growth, the strongest in three years. However, this drops to 5.1% without mining and energy, and to 1-2% without financials. Of the 197 companies that reported, 32% beat consensus earnings by over 5%, while 16% missed by the same margin. This disparity shows the uneven recovery across sectors, with certain industries propping up the overall growth figures.

Yet, only 18% guided FY27 expectations above street estimates, with 30% guiding below. Overall, ASX 300 earnings surprised by 0.15%, driven by margins and cost control, not sales growth. This reliance on cost-cutting rather than revenue expansion raises questions about the sustainability of earnings growth in the face of ongoing economic challenges.

Historically, this June’s earnings surprise was strong relative to previous halves. However, the momentum in forward earnings estimates has flipped since February, shifting from upward EPS momentum to broad-based downgrades. This reversal reflects growing concerns about the economic outlook, with companies struggling to maintain growth trajectories amid rising costs and weakening consumer demand.

Sector performance diverged sharply. Global-facing healthcare and materials outperformed, while domestic financials, REITs, and consumer discretionary lagged. Notably, rallies weren’t always confirmed by earnings. For instance, materials’ strength, tied to earlier commodity-price tailwinds, is fading. This divergence highlights the importance of distinguishing between cyclical and structural trends in sector performance.

Similarly, healthcare’s rally ran ahead of earnings, with companies like CSL and Cochlear delivering in-line results but seeing small downgrades. Their moves reflected relief, not renewed earnings upgrades.

UBS research found that of the non-resources stocks rising over 5% on results, 27 of 37 were relief rallies. These stocks had fallen over 20% year-to-date and, despite bouncing, remained down 12%, with earnings cut by 0.5%.

Companies exposed to the slowing domestic consumer and housing market, like Temple & Webster, JB Hi-Fi, and Premier, disappointed. Household spending is squeezed by affordability pressures, high interest rates, and a softening labor market, despite 6% wage growth.

Beneath these trends lies a broader divide. The economy isn’t contracting but is shifting from consumer-funded demand to business investment, including AI capex. This shift is constrained by labor, components, power, and funding, not demand.

Capital returns over growth spending

Corporate Australia’s balance sheets are healthy, but this is showing up in capital returns, not growth re-rating. It was a record season for buybacks, with 23 new programs totaling A$4.4 billion, led by Telstra and CSL with A$1 billion each. Companies like Suncorp delivered dividend upgrades, special dividends, and buybacks.

Distributions remained resilient despite earnings downgrades, with BHP announcing its highest dividend in four years.

This reporting season, around 60% of ASX-listed companies discussed AI in their results, a new high. Most focused on productivity and cost efficiency, with measurable gains seen in data centers, connectivity, and hardware. Companies like CBA, REA, and Carsales cited specific benefits.

However, growing pains are evident, with inflation pressures from memory, hardware, and software costs. Corporate Australia is now asking how much AI is worth to the bottom line, though for most, the answer remains “not much yet.”

Most share-price performers this season rallied on relief, not belief. The market is cautious, given slowing consumers and downgrades. Yet, company-specific execution still gets rewarded. After a season of relief rallies, the names where earnings actually delivered are worth a closer look.