Key themes shaping this ASX reporting season

As this ASX reporting season gets well and truly underway, expectations are running high. Several key themes are likely to shape conversations throughout August.

KEY TAKEAWAYS

• Earnings under pressure. There are high stakes with the ASX trading at historically elevated multiples. Despite strong market returns, ASX200 earnings have been flat or declining for three years (~15% annually). While we have seen a strong start to reporting season,  a reset of estimates and downgrades are likely, as companies face margin pressure and uncertain economic conditions.
• Policy and rate environment creating volatility. The RBA lowered the cash rate to 3.6% on 12 August, with market expectations of further rates on the horizon creating more confidence in outlooks this reporting season. Meanwhile, the outcomes of Treasurer Chalmers' productivity roundtable (19-21 August) will shape discourse around improving supply and long-term growth prospects.
• Cost discipline takes centre stage. Companies are embracing workforce reductions and being pressed to demonstrate real AI applications and clear capital return strategies to investors.

Earnings reality check 

Aggregate earnings across the S&P/ASX200 have been flat or declined in the past three financial years, while the benchmark has returned nearly 15% a year. There is also a risk of widespread earnings downgrades for the coming financial year as boards and investors weigh up earnings resilience, margin pressure, and macroeconomic conditions, which do not show a clear picture of what is around the corner (i.e., a will he, won’t he approach to tariffs).

Interest rates and monetary policy

The Reserve Bank of Australia (RBA) met on 11–12 August, with the central bank lowering the cash rate by a quarter of one percentage point [1] to 3.6% on the back of core inflation showing a downward trend in the 12 months to June. However, the RBA has also downgraded the long-term outlook for productivity growth as the economy is incapable of sustainably growing faster than 2% In contrast to the RBA’s cuts, higher-than-expected US CPI figures have dampened hopes for near-term cuts by the Federal Reserve, casting some uncertainty over the global monetary outlook.

National productivity policy in focus

Treasurer Jim Chalmers’ national economic reform roundtable on 19-21 August overlaps with earnings season. The summit will focus on lifting Australia’s lagging productivity (as indicated by the RBA’s growth downgrade referenced above), which is viewed as mission-critical to driving real wage growth and long-term living standards. As announced by the federal government on August 4, the roundtable will be centred around three principal topics: resilience, productivity, and budget sustainability and reform. The full agenda can be found here.

Given the timing of the roundtable, there is likely to be a flurry of media coverage and corporate commentary. Any signals or outcomes that emerge from these discussions may shape earnings calls and analyst questions. With access to clear air always a challenge, coordinated media strategies are evident among key participants in the roundtable, with the country’s biggest listed and unlisted companies and industry bodies (e.g., Business Council Australia, Super Members Council) leveraging their policy submissions to shape public discourse. 

Maturing AI conversations

Artificial Intelligence (AI) continues to be a thematic touchpoint across sectors, with the expectation that conversation moves from buzz to actual substance. The market is expecting tangible initiatives around how companies can streamline operations, reduce costs, or create new revenue models. Management teams have an opportunity to differentiate themselves and communicate how they use AI in practice and real-world applications.

Workforce reduction trends

Cost discipline remains front of mind, and the global trend of workforce reductions is making its way to Australia. In the U.S., major corporates such as Microsoft, Intel and Bank of America have all announced job cuts during recent reporting periods, framing them as essential for long-term competitiveness amid slowing productivity and wage pressure. With margins under strain and an aforementioned softening earnings outlook, layoffs as a means of cost reduction may become a recurring feature of this season’s announcements.

Geopolitics sparking Board ‘paralysis’

Geopolitical risk is adding another layer of uncertainty. There is a sense that this confluence of risks may be causing a form of “paralysis at board level,” particularly for companies with global operations or cross-border M&A ambitions. Friction between a long period of increased globalisation against more recent nationalistic and deglobalisation trends is now front and centre for corporates navigating complex supply chains and geopolitical pressure points.

Use of capital in focus

As always, the market will reward transparency, capital discipline, and credible pathways to growth. August is a typical period for companies to set out their capital management priorities and announce buyback programs. Against an uncertain macroeconomic backdrop, there is likely to be an increasing spotlight on perceived risk-taking and sensible use of capital. Additionally, capital return will be in the spotlight, as shareholders call for clarity on dividend outlooks and buyback strategies, particularly those who signalled a pause in this through the Covid-19 period.