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Corporate earnings show resilience against volatility but risks remain

Australia’s February reporting season should not have been much of a surprise. By the time companies started to report results, evidence for a strong reporting season had been piling up for months. Economic growth through the second half of 2025 was consistently firm, financial conditions remained supportive and business indicators were improving. Offshore, global growth tailwinds were strengthening with corporate credit conditions extremely favourable.

Corporate Australia did not stumble into reporting season hoping for luck. It arrived well prepared. Price increases pushed through earlier in the cycle were still flowing through revenues (banks, insurance companies, retailers, healthcare). Cost-out programs embedded across FY24 and FY25 were finally showing up in margins (banks, Telstra (ASX:TLS), Downer (ASX:DOW), AGL (ASX:AGL), James Hardie (ASX:JHX)). Capital expenditure had been deliberately restrained with balance sheets fortified and cash flows picking up.

Even the sell-side was embracing an improving earnings backdrop. After a prolonged period of downgrades through much of FY24, consensus expectations began to stabilise in mid-2025 and then accelerated meaningfully higher through the second half of the year. The upgrade cycle was initially driven by resources and banks, but it broadened as industrial companies began to demonstrate margin recovery from price increases and cost-out programs. By the time reporting season arrived, consensus ASX200 earnings growth expectations for FY26 had moved meaningfully higher to sit at around 10% for the entire market.

In other words, reporting season was not the catalyst for an upgrade cycle - it validated one that was already underway with earnings beats, guidance upgrades and capital returns confirming what revisions data had been signalling for months. The bad news is that trying to position for the reporting season was more difficult than normal. To start, beats have on average outperformed (+2.1% according to Morgan Stanley) and misses have on average underperformed (-6.3% according to Morgan Stanley) which means the direction of performance was inline with expectations. But the variation was huge and for certain stocks it was carnage regardless of the company’s size.

This is a break from history. Traditionally large cap stocks have been the ballast (low beta plays) for the market throughout reporting season with small and mid-cap stocks the high beta plays. This time around we have seen some of the largest stocks in the market – banks, diversified miners and healthcare – making huge one day moves off the back of results. CBA (ASX:CBA), the largest stock listed on the Australian share market, has seen its share price rally over 13% in one day, and as much as now up 20% for the month. BHP (ASX:BHP), the second largest stock, also had a strong result with good cash flow. It rallied 8% on the day and almost 16% for the month. On top of this, we have seen extreme price volatility in other parts of the market such as tech and/or growth stocks with most more than 30% since the beginning of the year. It is all part and parcel of the reporting season and it does appear that price action has settled down the deeper we go into the season. But there are three important observations to keep in mind as we look forward in the equity market.

First, the earnings backdrop is solid, and strength is broadening out as contributions come from both better-than-expected revenue lines as well as gains from strong pricing decisions and cost-out programs implemented in FY24–FY25 were still flowing through. Banks reported stable margins and strong capital positions rather than the feared collapse in profitability. Industrials such as Brambles (ASX:BXB), Aurizon (ASX:AZJ) and James Hardie demonstrated margin expansion driven by productivity gains and easing input costs. Supermarkets and utilities showed that earlier price resets were still underpinning revenue growth even as volumes normalised.

Second, there was cautious but improving guidance, with management teams more confident about margins and cash flow - Ansell (ASX:ANN), James Hardie (ASX:JHX), Breville (ASX:BRG), Brambles (ASX:BXB). Many companies upgraded or reaffirmed earnings expectations, but language around FY26 remained deliberately conservative. What stood out was the divergence between businesses with contractual pricing, inflation linkages or strong market positions, which leaned into confidence versus those with cyclical exposure which were more guarded citing consumer fatigue and policy uncertainty. In addition, capital expenditure stayed tightly controlled, reinforcing the idea that corporates are prioritising returns over expansion.

Third, the talk of AI was everywhere even if the benefits are back-end loaded. AI featured prominently across reporting season commentary, but the tone was notably more measured than promotional. Management teams were clear that AI is becoming a strategic necessity, not a discretionary growth lever — and that distinction matters for earnings. In the near term, AI showed up far more on the cost line than the revenue line. Companies across banks, telcos, professional services and technology-enabled industrials pointed to rising investment in data infrastructure, cloud migration, cyber security and talent.

These costs are being absorbed, now often framed as 'investment for efficiency', but with limited immediate earnings uplift. Where benefits were discussed, they were largely incremental and internal: productivity gains, automation of back-office functions, improved customer engagement and decision support. Very few companies pointed to material, monetisable AI-driven revenue streams today. Importantly, management teams consistently emphasised that AI benefits accrue over time, while execution risk remains high.

Striping out some crazy price action, Australian corporates have delivered a great set of earnings results. For the most part, it signals a solid earnings backdrop and one where management teams have set a baseline that should allow upside operational leverage if cyclical conditions improve. In addition, there was a lot for shareholders with dividends and capital returns a big feature (BHP, Dexus (ASX:DXS), Bluescope (ASX:BSL), Suth32 (ASX:S32), Telstra (ASX:TLS)). But at the same time, there are numerous cross currents which require navigating at both a corporate and investor level.

Domestic policy uncertainty is rising as the RBA has another attempt at bringing inflation down. Tariff uncertainty is on the rise again and there are concerns about conflict in the mid-east. This is before the “elephant in the room” is addressed - the rolling train wreck that AI is causing for many traditional industries (insurance brokers, wealth management, logistics and freight brokers, real estate and payment processors to name a few in recent months). This comes on top of enterprise software which is ground zero for disruption and disintermediation.

When we balance this all up, we are confident that earnings are on a much firmer footing with reporting season confirming that corporate Australia can defend margins through pricing discipline, cost control and balance-sheet strength, even if demand softens. That resilience provides a buffer against volatility, but it does not eliminate risk. With inflation proving sticky and the RBA still signalling a willingness to lean into higher rates, investors are being asked to navigate a very uncertain backdrop.

In this environment, broad-based multiple expansion looks unlikely, but investors should be focus on where fundamentals are likely to be in 12-18 months and not where they are today. On this basis, we think the reporting season has thrown up plenty of opportunities like Dominos (ASX:DMP), A2 Milk (ASX:A2M), Flight Centre (ASX: FLT), Cochlear (ASX:COH). But even with these names it’s unlikely to be a one way journey, and remember only patient investors will be rewarded.

 

Jun Bei Liu is a co-Founder and Lead Portfolio Manager at Ten Cap. Jun Bei is also a popular media personality and a highly sought after public speaker about her investment views. This information is intended for general use only. The information presented does not take into account the investment objectives, financial situation or advisory needs of any particular person.

 

  •   4 March 2026
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