Reporting season of February 2025 broadly surprised to the upside however was a very mixed bag with some strong misses among key listed names. For the season, over 320 companies reported with 33% beating expectations, 35.5% meeting expectations and 31.2% missing expectations. 45 companies were upgraded by brokers while 52 were downgraded.

Prior to reporting season, the market was expecting single digit earnings growth across the board for the first half given extenuating conditions of elevated interest rates, subdued demand and consumer spend, a slowing economy, Trump’s re-election impacts, China’s soft recovery post-pandemic, escalating geopolitical tensions, and inflationary pressures eating into earnings, margins and elevating costs. Despite companies guiding to low single digit earnings growth in the first half, this conservative outlook was smashed by many this reporting season, especially for those who implemented price hikes and stringent cost management systems to ease headwinds throughout the first 6-months of FY25.

Sector Performance:

While the ASX key index posted a loss of 4.2% in February, sectoral performances varied:

• Best-performing sector: Utilities (+3%)
• Worst-performing sector: Information Technology (-11%), mainly due to Wisetech Global's struggles
• Strongest beats: Communication services
• Most misses: Healthcare and tech stocks

While the key index posted a loss of 4.2% over the reporting season month of February locally, on a sector basis, the best performing sector on the ASX the results season was the utilities sector with a gain of almost 3%, while the worst performer was the information tech sector with a fall over 11%, mostly weighed down by tech behemoth, Wisetech Global amid board-level issues.  The share price increases mirrored the net beats and misses by sector with the communications services stocks posting the most beats while healthcare and tech stocks posted the most misses.

Some of the niche retailers remained resilient and surprised to the upside despite strong headwinds of elevated input costs, inflationary pressures and depleted demand faced in 1H25. Discretionary spend has been easing with the latest reading for December in Australia showing a fall of 0.1%, however, during the first half, retail sales remained strong which fuelled unexpected tailwinds for our retail stocks.

Retail Resilience Amid Economic Headwinds

Despite the RBA announcing the first rate cut of the cycle, this takes a few months to flow through to eased cost-of-living pressures for Australians therefore, as alluded to by the retailers in 1H25 earnings reports, we may see subdued demand and depleted consumer spend in the discretionary space in 2H25 eat into profits at least for the first months of 2H25.

AI and Data Centers Shine

AI, data centres and chip-related technology stocks continued to perform well with investors driving up valuations on high growth expectations, especially in the interest rate cut environment. Goodman Group announced a $4bn capital raise, its first in 12-years, to supercharge its datacentre expansions, to which investors welcomed amid strong growth potential for AI and datacentres for decades to come.

Materials Sector: Pressured Yet Resilient

• Lower commodity prices and geopolitical tensions hurt major miners.
• BHP: Lowest dividend in 8 years (-23% profit slump).
• Woodside: Higher cost guidance affecting future payouts.
• Gold Miners: Strong gains fueled by a record gold price of $2,900/oz.

The materials sector faced strong headwinds in 1H25 due to depreciated key commodity prices amid subdued demand out of China and heightened geopolitical tensions. We saw big names like BHP post its lowest dividend in 8-years amid a 23% slump in profits, while Woodside issued guidance for higher costs set to impact dividend payout over the same period.

However, the gold miners soared this reporting season as strong results were underpinned by the gold price bull run, we are currently experiencing that has seen the spot price of gold hit US$2900/ounce for the first time ever. All-in-sustaining-costs is the key metric to determine a gold miners’ cost management against sales price which is where the margins are determined.

The financials sector has been on a run over the last 12-months, thanks in part to the elevated interest rate environment, that has seen CBA shares hit a record $167.92/share in recent weeks. The outlook for the sector though is for a pullback in valuations due to net interest margins peaking and interest rate cuts eating into margins.

Elevated competition levels, uncertain outlook and elevated cost pressures weighed on the utilities sector this reporting season and such headwinds are expected to persist into 2H25.

In summary, retailers surprised to the upside, as did gold miners, materials stocks pushed through the pain of tough operating conditions to mostly meet or slightly beat expectations, and financial have a tough road ahead as further rate cuts are imminent.

Dividends: Winners & Losers

• Winners: A2 Milk (+19% share price, first-ever dividend), Telstra (+5.6% dividend increase).
• Losers: BHP (-30% dividend), Rio Tinto (lowest payout since 2017).

On the dividends front this reporting season it was a mixed bag. Although earnings exceeded expectations, dividends were a key concern heading into this reporting season. Debt repayments, investments in growth, and strategic shifts led some companies to reduce dividends. In contrast, others saw strong demand in China and maintained strict cost management, which allowed them to issue inaugural dividends.

A2 Milk Company, a producer of infant milk and dairy products, surged over 19% following the release of strong first-half results, which included the declaration of an inaugural dividend of 8.5 NZ cents per share. Similarly, Telstra Group increased its interim dividend by 5.6%, raising the payout to 9.5cps, after a robust profit boost in 1H25 that surpassed analysts' expectations.

On the flip side, mining giant BHP reduced its dividend by 30%, lowering it to 50 US cents per share, which was slightly above market expectations of 49 US cents. However, this decrease reflected a broader decline across most performance metrics, with rising costs and weaker demand putting pressure on margins and profits.

Rio Tinto also significantly cut its dividend this reporting season, bringing full-year payouts to the lowest level since 2017, again due to the depressed commodity price environment during the first half of the year.

So, what did this reporting season really tell us about the market and valuations?

Earnings growth was generally stronger than expected in the first half, but this may not be repeated in H2 as the high cost of living pressures and elevated inflationary pressures continue to hurt margins and demand for at least the next few months. Niche retailers that target the younger demographic or those that have exposure to the high growth AI space, continued to exceed expectations and report strong margin expansion, which is showing no signs of slowing down into H2.

For those who underperformed expectations this reporting season, investors were very fast to hit the sell button given valuations across key sectors have been red hot over the last 12-months. Double digit sell-offs were not uncommon when a company disappointed with results.

Market Outlook for 2H25

Key Themes for the Next Six Months:

• Earnings Growth: Strong in 1H, but slowing in 2H due to inflation and cost pressures.
• Retail Stocks: Continued resilience in niche markets, but broader discretionary weakness expected.
• Financials: Facing margin pressure from rate cuts.
• Materials: Potential rebound in commodity prices due to China’s demand recovery.
• AI/Data Centers: Expansion momentum expected to continue.
• Trump Tariffs: Potential ripple effects on Australian companies.

As for the outlook for 2H25 so far, we have seen a broad picture painted for key sectors to continue facing inflation cost pressures like utilities companies, while retailers are expecting subdued demand to continue into the second half. Materials companies on the other hand are expecting a rebound in key commodity prices thanks to increasing demand from China, and expansion in the datacentre/AI space is expected to continue well into FY26, especially after Goodman Group announced a $4bn capital raise in results out this week to turbocharge its datacentre portfolio. However, we remain cautious on Trump tariff implications flowing onto Aussie companies in the second half – watch and wait in this space.

The second half may also present challenges of continued input cost inflation eating into margins, foreign exchange pressures, and tariff implications on global inflation, earnings growth and cost of operating both at home and in the US.

Uncertainty on a global scale will likely see conservative guidance forecasts for full year 25, however, we may be surprised by the strength and resilience of our listed entities come August reporting season. As it was this reporting season, companies were quick to narrow and even lower guidance ranges to ensure investor expectations are not overly optimistic come the end of the fiscal year.

From a results perspective the key trends identified across the board were as follows:

• Double digit earnings growth was more common than not in the first half, however, a slower second half growth is expected on an earnings growth front.
• Financial stock valuations are finally coming under pressure as banks like NAB and Westpac face lower net interest margins and greater switching between customers.
• Macroeconomic changes will dictate earnings growth in H2.
• Inflationary costs are likely to ease by the latter end of H2.
• Aussie consumers are still spending, mostly with niche retailers who target the younger demographic.
• Cost cutting measures are the key to margin growth in H2.
• Investing in AI is the key to enhancing operational efficiency moving forward.
• Dividends will be a key driver behind investor moves come the August full year results period.

Investor Takeaways: How to Position for 2H25

Firstly, it is important to keep an eye on the macroeconomic environment as this impacts the earnings outlook for any listed company. At present, we are keeping a close eye on Trump’s tariffs that came into effect March 4, China’s ongoing recovery post-pandemic, Australia’s economic data readings that govern the RBA’s rate journey and geopolitical tensions through the wars ongoing in the Middle East and Russia/Ukraine.

Next, it is also important to analyse any announcements, trading updates and price sensitive news out of the companies in your watch list. With heightened uncertainty on an outlook front for companies, we will likely see updates to guidance as companies navigate the turbulent macro conditions especially in Q3.

And finally, monitoring valuations is a key to knowing how much you are paying for earnings when investing in any company. Bell Potter research provides 12-month price targets and ratings on a vast array of ASX listed companies so taking some guide from the analysts’ research can help you navigate the markets in the current environment.