Reporting season was stronger than share prices suggest

With the August reporting season now in the books, it is a good opportunity to take a step back from the daily earnings headlines and assess what actually changed across the market. To do this, I collected data from the earnings notes of 164 ASX listed companies in our coverage, focusing on fair value changes, sector trends and same-day share price reactions.

The purpose of this analysis was to uncover the hidden trends in earnings season and the results paint an interesting picture.

Taking a top-down approach, lets examine where investor sentiment appears to have diverged from underlying fundamentals this earnings season.

More upgrades than downgrades

The August earnings season was broadly positive from a valuation perspective. Across 164 ASX listed companies, 45 companies received fair value upgrades from Morningstar analysts and 29 received fair value downgrades. The majority (90 companies) saw no change to fair value.

This equates to an upgrade ratio of 27% compared with a downgrade ratio of 18%, suggesting companies typically met or beat our analysts’ expectations. The strongest sectors in terms of fair value upgrades were Healthcare, Utilities and Industrials, which recorded the highest upgrade ratio scores. In contrast, Technology stood out as the clear laggard with 7 downgrades outnumbering 4 upgrades.

Interestingly, the average share price move on the day of reporting was a decrease of 1.96% (median -0.45%). This is starkly different to my February earnings wrap which saw the average share increase by 0.56%. The biggest difference between the February and August earnings wraps is that the pool of shares in August is substantially larger (30 vs. 164 companies), with smaller companies skewing the August same day returns.

To address this problem, I found the market weighted average share price return on the day of reporting to give a broader market view. The average return based on market cap was less pronounced, with an average decrease of 0.127%. This suggests that on both an equal and market cap weight basis, the average share in our coverage declined post result.

This also indicates much of the weakness during reporting season was concentrated among smaller companies, while the largest constituents in the ASX remained comparatively resilient.

The chart below shows that companies receiving fair value upgrades rose 2.6% on average, while those that received downgrades fell 5.4%. Stocks with unchanged fair values still declined 3.1%, suggesting investors entered reporting season with elevated expectations. It also highlights the gap between short term market reactions and our longer-term assessment of intrinsic value which changes less frequently.

The biggest market movers

The biggest share price movers highlight how strongly investors reacted to surprising or disappointing earnings results. Bapcor (ASX.BAP) was the standout same day performer, rising 41% on result day while Zip (ASX.ZIP), CSL (ASX.CSL) and Judo (ASX.JDO) also delivered strong gains. Several of the strongest performers entered reporting season with subdued investor expectations, effectively lowering the bar for earnings.

Retail and consumer names featured prominently among the top same day movers, with Super Retail (ASX.SUL), PWR (ASX.PWH), ARB (ASX.ARB), Lovisa (ASX.LOV) and Stockland (ASX.SGP) all posting double-digit gains on the day of their results. In contrast, a number of tech companies experienced sharp same day share price declines, with Hansen Technologies (ASX.HSN), Life360 (ASX.360) and Pexa (ASX.PXA) among the weakest performers.

The scale of these moves demonstrates that reporting season remained a significant share price catalyst with investor expectations often proving just as important as the underlying result. Companies that met or exceed expectations following a period of investor disappointment were rewarded strongly, while even modest disappointments resulted in double digit declines.

The top end of the market remained sturdy

The reporting season was notably different for the top end of the ASX. Most of the ASX’s largest companies delivered results that were largely in line with expectations, with the majority retaining their fair value estimates and generating relatively modest share price reactions.

Healthcare was the standout sector. CSL rose 17% on results day despite no change to its fair value estimate, while Cochlear (ASX.COH) gained 7.5%, suggesting investors entered reporting season with expectations that were too pessimistic. In contrast, the major banks delivered a mixed bag. Commonwealth Bank (ASX.CBA) received a fair value upgrade yet fell 0.6% on the day, while National Australia Bank (ASX.NAB) and Westpac (ASX.WBC) declined 4.0% and 6.0%, respectively. ANZ Group (ASX.ANZ) was the exception rising 4.0% following its result.

Aussie resource giants also generated relatively muted reactions. BHP (ASX.BHP) was upgraded and rose 2.7%, while Rio Tinto (ASX.RIO) gained 3.7% and Fortescue (ASX.FMG) was little changed. Similarly, defensive consumer names Coles (ASX.COL) and Woolworths (ASX.WOW) delivered solid but unspectacular outcomes.

As shown in the chart below, only four companies saw changes to their fair value estimates, with Goodman the sole downgrade. The remaining large caps in the top 20 all went unchanged, implying results were typically in line and any changes to guidance were immaterial to the long term view.

The notable exception was healthcare, which delivered some of the strongest positive market reactions despite relatively few changes to underlying valuations.

Expectations mattered more than earnings

One of the more interesting findings from the dataset was the disconnect between fair value changes and same-day share price reactions. While 45 companies received fair value upgrades, several still experienced negative share price reactions on the day of their results.

Examples included ResMed (ASX.RMD), Medibank (ASX.MPL), JB Hi-Fi (ASX.JBH) and Sigma Healthcare (ASX.SIG), all of which received valuation upgrades but failed to generate positive market reactions. In contrast, a number of companies that saw no change to fair value produced strong share price gains following earnings.

This highlights an important lesson from the August earnings season. Earnings results are only one part of the equation. Share price reactions are often driven by how results compare to investor expectations. In many cases, companies that simply met expectations were sold off, while businesses that met or exceeded an already lowered bar were rewarded despite no meaningful change in underlying valuation.

Wrap up

The August reporting season painted a picture of a resilient market despite greater same day trading volatility. Additionally, the contrast between large cap and smaller companies was evident. Many of the ASX’s largest companies delivered predictable results that reinforced existing investment cases.

Smaller companies experienced far greater dispersion in both earnings outcomes and share price reactions. Healthcare emerged as the standout sector and technology was the weakest from a valuation revision perspective.

Overall, while the average company experienced a negative share price reaction on the day of its result, analyst revisions were notably more positive. This implies that underlying business performance was generally stronger than what share price movements imply on their own. For long-term investors, this suggests that some of the most attractive opportunities may emerge in companies where short-term share price reactions diverged materially from changes in underlying intrinsic value.

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