Rudi’s View: In Corporate Earnings We Must Trust

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This story features ZIP CO LIMITED, and other companies.
For more info SHARE ANALYSIS: ZIP
The company is included in ASX200, ASX300 and ALL-ORDS

Is it possible general worries are simply too negative as equities continue their ascent?

By Rudi Filapek-Vandyck, Editor

This time last year the buzz around equity markets was all about expensive valuations, a narrow market breadth and concerns about AI momentum having rallied too quickly too far.

Sounds familiar?

There were a few stumbles here and there, including a weak start into the new calendar year, but equities kept on trending upwards until that shock announcement on tariffs from the new administration in the White House sent markets into a brief sell-off.

Would markets have sold off without the threat of unprecedented US import tariffs?

We don’t know, of course, as we cannot simply run an alternative history from which we can judge, but if strong price action post that April sell-off is anything to go by, I think the answer is negative.

So here we are again, one year later and the ASX200 is more than 12% higher, including dividends, while US markets have performed even better.

The S&P500 has generated a total return of 15.50% since and for the Nasdaq100 the total gain amounts to a smidgen under 24%.

Twelve months on and the buzz around equity markets hasn’t changed much. If anything, concerns about expensive valuations and hundreds of billions spent on AI infrastructure have only attracted more attention.

All of this raises the obvious question: are investors too worried about expensive looking valuations and therefore missing the reason(s) why shares continue to trend into higher highs?

Corporate Earnings Support

A lot has been written about US indices, carried by a limited selection of Champion stocks, setting fresh all-time record highs in the face of tariffs and other threats.

What is seldom highlighted is that US corporate earnings for the first two quarters have been better-than-expected with a similar outcome anticipated for the Q3 season that commenced last week.

In Australia, the underlying dynamic hasn’t quite been as positive, but there should be little doubt investors here too are adopting an optimistic outlook on corporate earnings for the year(s) ahead.

This is why the focus has returned to miners and smaller cap companies. In many cases, the improvement in earnings hasn’t shown up yet, which can make a stock look expensive in the here and now.

Whether ‘expensive’ leads to a higher or lower share price might well depend on what earnings growth looks like.

That investor dilemma was perfectly illustrated on Monday when fast-runner Zip Co ((ZIP)) released yet another better-than-forecast quarterly market update, after which its share price was rewarded with a further 4%-plus gain.

Zip Co shares had already rallied close to 50% year-to-date and more than 300% from the April low.

A much cheaper priced Bapcor ((BAP)), on the other hand, issued yet another profit warning and its shares are being punished in excess of -18% in the aftermath.

Those shares hardly budged back in April, believe it or not, but Monday’s fall pulls this year’s loss to more than -43%.

Loyal shareholders will not want to be reminded this share price once traded north of $8.

We can replace Zip Co with NRW Holdings ((NWH)) or Dyno Nobel ((DNL)) and Bapcor with Treasury Wine Estates ((TWE)), but the key principle remains the same.

Should equity markets sell-off when corporate earnings are poised for upside surprise?

The question applies as much to the US as it does to the local market.

Return Of Earnings Optimism

As can also be observed from FNArena’s weekly updates (every Monday morning), general optimism regarding corporate earnings is unmistakably in a renewed uptrend post the August results season.

While much of this stems from higher commodity prices, including rampant rallies for silver and gold, the likes of SRG Global ((SRG)), Telix Pharmaceuticals ((TLX)) and Regal Partners ((RPL)) are equally enjoying upgrades.

Thus far, corporate results in Australia post August are nothing to get excited about, but this can change dramatically in the weeks ahead when Newmont Corp ((NEM)), ResMed ((RMD)), Macquarie Group ((MQG)), Dyno Nobel, Orica ((ORI)) and three of the Big Four banks, among others, update on their financial performances.

But wait… there’s also the local AGM season and Macquarie strategists have been predicting for weeks now the net outcome should be positive; i.e. we should see more of Zip Co-alike experiences and less disappointment a la Bapcor and Treasury Wine.

On Monday, those strategists updated their views for AGM outcomes, with positive updates expected from Codan ((CDA)) and Sigma Healthcare ((SIG)) this week.

Macquarie’s list for positive market updates also includes:

• Ansell ((ANN))
• Downer EDI ((DOW))
• Harvey Norman ((HVN))
• Monadelphous ((MND))
• NRW Holdings
• and Propel Funeral Partners ((PFP)).

To add to the credibility of Macquarie’s forecasts, the list of potentially negative AGM updates includes Fletcher Building ((FBU)) and Bapcor ((BAP)) and both have updated accordingly.

For the week ahead, Macquarie also nominated Australian Clinical Labs ((ACL)) for disappointment so watch this space on Thursday when that AGM takes place.

Others nominated for negative market updates this AGM season:

• Domino’s Pizza ((DMP))
• Inghams Group ((ING))
• Regis Healthcare ((REG))
• Lovisa Holdings ((LOV))
• WiseTech Global ((WTC))
• and Temple & Webster ((TPW)).

Macquarie analysts have equally been upgrading earnings forecasts throughout the past weeks with resources attracting the lion’s share of better forecasts.

Banks and REITs have been enjoying much smaller upgrades. Thus far, report the strategists, the improvement in growth outlook is eluding local industrials.

Something to watch?

FNArena’s four-weekly calendar:

https://fnarena.com/index.php/financial-news/calendar/

December Index Changes

More changes are forthcoming with Standard & Poor’s in December announcing the next set of index inclusions and exclusions.

Canaccord Genuity is predicting more changes for the ASX50, which tend not to have much impact for share prices but act more as an indicator for market momentum and trends generally.

Current data crunching by analyst Lachlan Woods suggests Mirvac Group ((MGR)) and Amcor ((AMC)) might well lose their status as a Top50 constituent in favour of Lynas Rare Earths ((LYC)) and WH Soul Pattinson ((SOL)).

Could well lose their status as a local large cap, assuming they’re dropped from the ASX100, are Reece ((REH)) and Reliance Worldwide ((RWC)), with removal of Pinnacle Investment Management ((PNI)) considered as ‘possible’.

Probable replacements are Eagers Automotive ((APE)) and Zip Co, while Capricorn Metals ((CMM)) could replace Pinnacle.

Potentially more impactful changes relate to the ASX200, with all of the following seen as potential candidates to be dropped from the index in December:

• Boss Energy ((BOE))
• IPH Ltd ((IPH))
• Inghams Group
• HMC Capital ((HMC))
• Domino’s Pizza

The research also identified both Bapcor and Karoon Gas ((KAR)) as possible removals.

Are likely to be added:

• Resolute Mining ((RSG))
• Pantoro Gold ((PNR))
• NexGen Energy ((NXG))
• Clarity Pharmaceuticals ((CU6))
• Service Stream ((SSM))

Possible replacements for Bapcor and Karoon are Ora Banda Mining ((OBM)) and Aussie Broadband ((ABB)).

S&P will make its announcement on Friday 5 December with changes to be implemented after the market close on Friday 19 December.

Trends In The USA

One of the trends that stands out from US equities is market negativity towards homebuilders.

In isolation, this could be interpreted as simple confirmation it’s likely too early yet to adopt a more constructive view for the likes of Reece, Reliance Worldwide, James Hardie ((JHX)) and Brickworks (now part of WH Soul Pattinson), but analysts at RBC Capital equally point out, historically, this does not bode well for smaller cap companies (still enjoying favour).

As one would expect, that particular part of corporate America (homebuilders) is confronted by a weak earnings outlook, currently still in a downtrend.

But there might be more to this story as earnings forecasts for the S&P500 outside of the Top Ten companies have started to deteriorate too.

Goes without saying, this divergence in earnings sentiment is a negative data point for the broadening market leadership thesis.

Yet another reason why the current Q3 earnings season in the US might prove all-important (also in the absence of official economic data).

Equally noteworthy: there’s no indication capex in the US, outside of AI, is picking up.

Too much uncertainty because of on/off tariffs?

Yet again, I shudder by the thought of what would today’s US economy –and by extension its equity markets– look like without the AI megatrend.

Too Much Negativity?

Not a day goes by or I am being reminded by how much cash is sitting on the sidelines, waiting for equities to “correct”.

There’s definitely more risk in this market, ranging from renewed tension between China and the US, the US government lockdown, deteriorating technical signals, pockets of over-exuberance and heavy reliance on AI and more central bank rate cuts — all at a time when many worry about valuations.

But there are equally plenty of positive offsets, including better-than-forecast corporate earnings (and the promise of AI helping to widen margins further), lots of spending on AI infrastructure, and more rate cuts from central banks.

Today’s markets are equally impacted by a younger generation of traders whose main strategy consists of buying the dip. And that’s exactly what they do.

Turns out, hedge funds have been among the heaviest casualties of this new market dynamic in 2025.

I read elsewhere only about 20% of active managers are outperforming US markets thus far this year.

Short-term, even technical readings are far from uniform with equities seemingly ‘overheating’ on some indicators, but nowhere near the danger zone on other indicators.

One lesson I learned from more than three decades of covering financial markets is to never draw fixed conclusions from one or two indicators only.

As smart cookie Alfonso Peccatiello concluded last week:

“A healthy pullback amidst a strong rally in global risk assets makes sense, but I don’t see the ingredients for a sustained macro sell-off unless the US and China really clash hard in a couple of weeks.”

Given the tendency of markets to surprise the majority of (worried) participants, and with so many negative and worrying views out there, I don’t think investors should discount the possibility that markets will continue their uptrend into year-end.

Still, it’s probably best to remain disciplined and nimble. Any surprises can still occur in either direction.

(But I tend to agree, buying the dip seems but appropriate in case of a market draw down, plus, no, the AI megatrend is far from over and nowhere near resembling a bubble).

FNArena Talks

FNArena’s Danielle Ecuyer appeared on A Rich Life’s Claude Walker’s ASX Small Cap Wrap and that video can be viewed through YouTube:

https://www.youtube.com/watch?v=g4EKkLGwnT8

Review All-Weather Model Portfolio

The financial year ending on June 30th 2025 featured the return of Donald Trump in the White House and of extreme market volatility.

The second half of the year also saw doubt creeping into general sentiment towards AI and demand for data centres.

All in all, a gain of 13.85% (pre-fees) for the twelve months is not something to be unhappy about, right?

FY25 review of the All-Weather Model Portfolio: https://www.fnarena.com/index.php/download-article/?n=4B38C0EF-A173-8CE6-736A7AFC7B19FC49

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

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