Rudi’s View: Taking Stock Ahead Of August

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In this week's Weekly Insights:

-A warning from Longview Economics
-Some sage advice from Franklin Equity Group
-Taking Stock Ahead Of August

By Rudi Filapek-Vandyck, Editor

A warning from Chris Watling, Global Economist & Chief Market Strategist, Longview Economics:

“Signs of froth continue to build in global financial markets (especially in the US).

“As has been widely reported, this has been one of the fastest recoveries by the US stock market from a major drawdown. From the April 8th closing lows, it took 54 trading days to recover the 19% loss during the pullback (i.e. based on closing prices). By way of comparison, post the March 2020 COVID sell-off it took 107 trading days from the March 23rd lows to reclaim the highs (from Feb 2020).

“As that froth has emerged, our SELL-off indicator has continued to build to higher levels. As of yesterdays close it had reached +36 (an unusually high level for this model). At +20, it warns of a high likelihood of a pullback (and signals that global markets are becoming overly exuberant).”

Some sage advice from Jonathan Curtis, Chief Investment Officer Portfolio Manager Franklin Equity Group:

“The market sees AI as a tech story. Smart investors see it as an everything story.”

“In 1995, if you bought the PC leaders, you did well as an investor. But if you bought the smartest companies that built competitive advantage by digitizing their business early using the PC? You probably got rich.

“We believe today’s AI moment is bigger. It’s faster. And it’s hiding in plain sight.”

Taking Stock Ahead Of August

At face value, the local share market hasn’t paid much attention to corporate earnings over the three years past.

As also highlighted last week, corporate earnings in Australia have steadfastly fallen some -18% from their all-time record high achieved in FY22, but three consecutive years of net negative growth have not withheld the ASX200 from returning a net positive 21% over the period.

Net negative earnings in combination with rising share prices can only mean the average valuation has risen markedly, and this remains a sticky point for strategists and market commentators.

Trading on 19x-20x times next financial year’s EPS forecast (forward-looking), and with the RBA hesitant to inject further stimulus into the domestic economy, it seems a lot is riding on positive surprises during the upcoming August results season.

All is not what it seems

While the need for positive market updates probably remains true, things look a lot less ‘bubbly’ underneath the surface.

For starters, resources (mining and energy) have not enjoyed the best of times throughout the period, and I am probably too polite about it. Resources have weighed down on the average EPS achievement.

While BHP Group ((BHP)) is forecast to deliver a net positive EPS growth contribution for FY25, many others including Rio Tinto ((RIO)), Fortescue ((FMG)) and Woodside Energy ((WDS)) are not.

A second important consideration involves the local banks whose notable re-rating has taken place against minuscule growth achievements only, with CommBank ((CBA)) in the unassailable lead. Given this is by far the most important index weight for the local bourse, the outsized impact on the average PE ratio needs no further explanation.

Look beyond CBA and BHP –the two largest index influencers– and their brethren and growth prospects look a lot less negative, with the correlation between share prices and growth in EPS and dividends a lot closer.

Within this context it’s probably worth highlighting the local healthcare sector continues to exhibit some of the strongest growth prospects, leading strategists at Macquarie to suggest money flowing out of the banks will not necessarily find a home among resources with healthcare offering a better looking proposition.

UBS strategists have been making that point for several weeks already.

Dual-listed ResMed ((RMD)) will be the first healthcare company to release Q4 financials this Friday. Its shares are up some 8.5% in less than two weeks ahead of what analysts anticipate should be yet another strong performance.

Shares in CSL ((CSL)) are up by some 12.5%, also helped by reduced threats from US import tariffs on European pharmaceuticals.

Currently, market consensus is only anticipating some 5% EPS growth for corporate Australia next year and, yet again, banks and resources sit below that number. History also suggests EPS growth forecasts tend to weaken as the financial year matures, as has happened throughout FY25 and the years before it.

One big question mark revolves around consumer spending, another one relates to the Australian property market.

In both cases analysts are counting on better times ahead, but with the RBA preferring to walk a cautious pathway to further easing, will August prove too soon to see corporate green shoots and CEO optimism colour next year’s outlook?

Momentum ahead of August

The above are definitely the key ingredients that make up the debates raging among investors in Australia, together with Trump’s tariff impacts, prospects for AI and data centres, and Chinese stimulus.

To minimise the risk for major disappointment in August, Macquarie suggests investors focus on companies currently enjoying positive outlook revisions, which can be read as a leading indicator for ongoing positive share price momentum.

Macquarie has identified the following inside the ASX100:

-Challenger ((CGF))
-Hub24 ((HUB))
-Pinnacle Investment Management ((PNI))
-Metcash ((MTS))
-Telstra ((TLS))
-Ramsay Health Care ((RHC))
-ResMed
-Sonic Healthcare ((SHL))
-Qantas Airways ((QAN))
-Sandfire Resources ((SFR))
-Woodside Energy

Among smaller cap companies:

-Amplitude Energy ((AEL))
-Australian Finance Group ((AFG))
-Spark New Zealand ((SPK))
-McMillan Shakespeare ((MMS))
-Monadelphous Group ((MND))
-Perenti ((PRN))
-Ventia Services ((VNT))

Companies that have been singled out because of the negative trend in analysts’ forecasts include Treasury Wine Estates ((TWE)), REA Group ((REA)) and Reece ((REH)) among large caps, and Domino’s Pizza ((DMP)), G8 Education ((GEM)), Audinate Group ((AD8)) and Healius ((HLS)) among smaller caps.

Contractors and services providers

The inclusion of three contractors and services providers in Macquarie’s small cap selection for positive earnings momentum aligns with analysts elsewhere that have identified this particular sector for strong momentum and potential for upside surprises.

UBS repeated that view on Monday, highlighting the sector in Australia looks poised for resilient growth with double digits expected in August (FY25) and for FY26. This broker identified Worley ((WOR)), SGH Ltd ((SGH)), ALS Ltd ((ALQ)) and Cleanaway Waste Management ((CWY)) as its Key Picks.

Sector analysts at Macquarie earlier reiterated their Outperform (Buy-equivalent) ratings for Ventia Services, Service Stream ((SSM)), Monadelphous, Perenti, Maas Group ((MGH)), and Worley.

Jarden analysts have a Buy rating for Symal Group ((SYL)) and Overweight ratings (one notch below Buy) for Emeco Holdings ((EHL)), Monadelphous and NRW Holdings ((NWH)).

Sticking with the smaller cap theme, analysts at RBC Capital nominated Temple & Webster ((TPW)), SiteMinder ((SDR)) and Hub24 ((HUB)) as their Top Picks among small cap industrials on the ASX.

Regular readers of our daily Australian Broker Call Report will have noticed, Citi analysts hold an above-average conviction on EVT Ltd ((EVT)) – and they cannot believe the market’s hesitance to jump on the opportunity.

Stockbroker Morgans sees plenty of opportunity among smaller caps that, as a group, have lagged the broader market led by large caps over the past number of years. Morgans sees stronger growth potential (double the growth on offer from large caps) priced on average at a relative -10% discount.

Morgans is in particular positively biased towards Corporate Travel ((CTD)), PWR Holdings ((PWH)), Qualitas ((QAL)), Suncorp Group ((SUN)), and Superloop ((SLC)), and has a negative anticipation for upcoming result releases from Ramsay Health Care and Super Retail ((SUL)).

Stocks selected as preferred exposures include CSL ((CSL)), Light & Wonder ((LNW)), Megaport ((MP1)), Pinnacle Investment Management, Qualitas, ResMed, and WiseTech Global ((WTC)).

The outlook for FY26

Market strategists at Wilsons agree with the general assessment that, after stripping out banks and resources, the Australian share market looks a lot less ‘bubbly’ and growth-constrained, and instead seems to offer plenty of opportunities.

On Wilsons’ adjusted assessment the median ASX-listed stock is only trading “a touch” above five- and 10-year averages while expected to grow at 6% in FY25, followed by 12% in FY26.

As per local tradition, forecasts for FY26 will probably weaken as corporate results provide updated insights, but all in all Wilsons strategists are willing to stick with a generally positive outlook.

Peers at Macquarie are prepared to take it one step further: they predict an upgrade cycle for local forecasts as FY26 takes shape and economic momentum turns.

Neither of these views negate the fact that August, once again, might prove tricky to navigate for investors as earnings momentum early in the new financial year might not have picked up yet while FY25 hasn’t exactly been flash for a sizeable group of companies.

See also the share price shellacking on Monday following uranium miner Boss Energy’s ((BOE)) market update.

Macquarie’s seasonality analysis suggests August usually marks the peak in downgrades for EPS forecasts. Thus far, downgrades have marked the first six months (H2 of FY25).

On Thursday last week firm punishment was reserved for small cap underwear retailer Step One Clothing ((STP)).

These pre-season disappointments do not hide the fact there has been no deluge in corporate profit warnings, as had been forecast by some, despite global tariff uncertainty and a more hawkish than anticipated RBA.

One of the extra features in the upcoming results season is that of a weaker trend for the US dollar. This is not unimportant given most of strong growing businesses listed on the ASX are international market leaders with a sizeable presence in the US, where tariffs are yet another feature to take into account.

Macquarie is anticipating cautious outlooks and guidance statements from companies still surrounded by plenty of question marks and uncertainties. This too could become a source of added share price volatility on the day of result releases.

REITs in focus

One sector that will be equally in focus next month are the real estate investment trusts, REITs.

The cycle for bond yields and central bank policy has turned for the better and the sector is expected to benefit through much improved operational cashflows and growth prospects ahead.

Here the challenge consists of not getting trapped in share prices that might have run too hard already, at least for the time being. Macquarie’s sector analysts are expecting upside surprises from the likes of Ingenia Communities ((INA)), Goodman Group ((GMG)), National Storage ((NSR)) and Scentre Group ((SCG)).

Peers at UBS see the best prospects outside of the usual large cap favourites, nominating Arena REIT ((ARF)), Centuria Industrial REIT ((CIP)), Charter Hall Long WALE REIT ((CLW)), Centuria Capital Group ((CNI)), Centuria Office REIT ((COF)), HomeCo Daily Needs REIT ((HDN)), National Storage, and Rural Funds Group ((RFF)).

UBS strategist Richard Schellbach has thus far been noticeably less accommodative than previous mentioned peers at Macquarie, Morgans and Wilsons. His forecast is for disappointing earnings, on balance, with cautious indications from CEOs and little evidence of positive impact from AI investments to date.

Such a downbeat tone in August might not kill off the current uptrend for the market, but Schellbach can see a ‘pause’ in the uptrend emerging for the months ahead.

As per always, lots shall be revealed as results releases accumulate throughout next month. Investors will get an early taste this week with scheduled releases from Champion Iron ((CIA)), Rio Tinto and ResMed.

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To keep up to date with earnings forecasts and rating upgrades and downgrades, FNArena publishes a weekly overview:

https://fnarena.com/index.php/2025/07/28/weekly-ratings-targets-forecast-changes-25-07-25/

FNArena’s Corporate Results Monitor (to switch soon into August mode): https://fnarena.com/index.php/reporting_season/

(This Monitor includes a calendar for August results).

In preparation of August:

https://fnarena.com/index.php/2025/07/24/rudis-view-bega-cheese-cettire-harvey-norman-sigma-siteminder-more/

https://fnarena.com/index.php/2025/07/23/rudis-view-extreme-bifurcation-ahead-of-august/

https://fnarena.com/index.php/2025/07/17/rudis-view-aussie-broadband-oohmedia-paladin-energy-seek-xero-more/

https://fnarena.com/index.php/2025/07/16/rudis-view-navigating-covid-legacies/

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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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(This story was written on Monday, 28st July 2025. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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