Transcript:

Hello and welcome, I’m Lochlan Halloway, equity market strategist at Morningstar. Welcome to the Morningstar Market Minute, our weekly update on everything markets and economics, each Friday lunchtime. So reporting season has almost wrapped up and in the main things have progressed reasonably well. Our analysts have made more upgrades than average, but we did start to see a few downgrades creeping up in the latter days of August.

What’s really stood out, though this month has been volatility. We saw huge share price swings for some big blue-chip stocks in the ASX like CSL (ASX:CSL), James Hardie (ASX:JHX) and Woolworths (ASX:WOW), the likes of which we haven’t seen in decades. But for long term investors, these reactions can create opportunities. Take Woolworths for example. Sure, its result was soft. It underperformed Coles (ASX:COL) in the latter part of the financial year, and it’s continuing to do so in the early months of fiscal 2026.

But in the long run, these gaps tend to close. We think that Woolworths has the scale and the cost advantage to cut prices, rebuild trust with customers and eventually regain market share. So for long term investors who are willing to look past this short-term period of underperformance, we see a compelling opportunity in Woolworths right now. So outside of earnings, the key domestic update this week was the July inflation indicator.

And it was hotter than the market had expected, mostly due to short term factors like electricity rebates and an uptick in travel expenses. It’s not something to be too concerned about at this stage. It’s only one months of data, and these monthly indicators tend to be volatile, but it is something worth watching given it does buck a recent trend of easing inflationary pressures.

The market still expects the RBA to cut rates this year, and that seems like a reasonable bet to us, but probably not as soon as September. So looking at broad, the big news this week was Fed Chair Powell update to the Jackson Hole symposium. Broadly speaking, his comments are on the dovish side that suggests that the fed is setting up for cuts potentially in September.

After his remarks, equity markets rallied, bond markets rallied and traders up their bets for September cut. So rounding out reporting season we generally see Aussie equity markets have stretched. Aussie shares have had a strong few years, but earnings haven’t really kept pace. Now we think that valuations are trading at abnormally high levels, about a 10% premium to our equity analysts fair value estimates.

That’s not unprecedented, but we haven’t really seen valuations here since 2021. It doesn’t mean that there is going to be a big correction or big slowdown in equities, but it might be the case that equity markets have to progress a little bit less strongly for a while as earnings catch up. So that’s all for this week. Thank you for joining me. And please join my colleagues next week for the next installment of the Morningstar Market Minute.