Australian equities: August reporting season delivers a mixed message
Australia’s August reporting season has provided a useful reality check for investors. While the overall earnings picture remains reasonably healthy, the results have reinforced our view that the Australian share market is becoming increasingly selective, with valuation and earnings quality more important than simply owning the index.
The headline is that corporate profits are recovering, but the recovery remains uneven. FY26 profit growth across the market was around 11.6%, although this falls to only about 5.3% when mining and energy are excluded. Expectations for FY27 and FY28 profit growth are also relatively modest at around 7 - 8%.
Importantly, only around 25% of ASX 200 companies delivered results ahead of expectations, while roughly half were broadly in line and one-quarter disappointed. Despite this, the ASX 200 gained around 1.6% through the reporting period.
This tells us something important: the market is increasingly looking through historical earnings and focusing on forward guidance, margins and the sustainability of growth.
CBA – outstanding business, but valuation remains the issue
Commonwealth Bank delivered another record result, with FY26 cash profit rising 7.1% to $10.98 billion. The final dividend increased to $2.70 per share, taking the full-year dividend to $5.05, up 4%. CBA also highlighted approximately $200 million of annualised savings from artificial intelligence initiatives.
On the surface, this is an excellent result. However, there was an important warning beneath the headline numbers. Mortgage applications fell 15%, with investor applications down 28%, while net interest margins remain under pressure.
The bigger issue for investors is therefore not the quality of CBA's franchise - which remains exceptional - but the price being paid for that quality. CBA trades at a substantial premium to the other major banks, meaning expectations are already high.
For us, this is an important distinction: a great company is not necessarily a great investment at any price.
BHP – copper is becoming the investment story
BHP provided one of the strongest results of the season.
Underlying profit increased approximately 30% to US$13.2 billion, while revenue rose 15% to US$58.8 billion. More importantly, copper has now overtaken iron ore as BHP's largest contributor to earnings, accounting for around 54% of EBITDA. Copper profits increased 48% to approximately US$18 billion.
The significance extends beyond the result itself. BHP is increasingly positioned around the structural demand for copper from electrification, power infrastructure, renewable energy and data centres.
The company increased its dividend to US$1.72 per share, its highest level in four years.
The investment thesis is therefore evolving from the traditional "China and iron ore" story towards a broader global electrification and copper scarcity story.
However, after a strong run in the share price, investors should recognise that expectations are also rising. The opportunity remains attractive over the long term, but commodity prices and valuation will ultimately determine the near-term return.
CSL – a reset rather than a collapse
CSL was another important result.
Revenue increased 2% to US$15.8 billion, while underlying NPATA was approximately US$3.1 billion, down 4% in reported currency terms. However, statutory NPAT fell dramatically to a US$2.6 billion loss, reflecting significant restructuring and impairment charges.
The more important message was that CSL believes FY26 represented a reset year, with the underlying plasma business remaining fundamentally sound.
CSL is an interesting example of why investors need to distinguish between reported earnings and sustainable earnings. The headline loss looks alarming, but the underlying earnings picture is considerably less concerning.
Wesfarmers – consumer resilience remains evident
Wesfarmers produced one of the cleaner results of the season.
Revenue increased 3.4% to approximately $47.3 billion, while underlying EBIT increased 7.3% to $4.49 billion and underlying NPAT increased 8.3% to $2.87 billion. The full-year dividend increased 7.8% to $2.22 per share.
The strength of Bunnings and Kmart was particularly encouraging, demonstrating that some of Australia's largest retailers continue to generate earnings growth despite a challenging consumer environment.
Qantas and Cochlear highlight the other side of the story
Not all results were positive.
Qantas reported underlying profit before tax of $2.06 billion, down 14%, with higher fuel costs and international operating pressures weighing on earnings.
Cochlear also experienced a difficult year. Underlying profit declined to approximately $322 million, although the result was towards the upper end of revised guidance and management remains confident about the long-term hearing implant opportunity.
These results reinforce a broader theme: cost pressures, wages, energy and weaker consumer demand are making revenue growth harder to convert into profit growth.
What does this mean for investors?
Our interpretation of the August reporting season is cautiously constructive, but not complacent.
The Australian economy is producing sufficient corporate earnings growth to support the market, but the distribution is increasingly narrow. Mining, selected healthcare, technology and high-quality industrial companies are producing more attractive earnings outcomes than some of the traditionally dominant parts of the market.
The major banks are the clearest example. They remain highly profitable and provide attractive dividends, but their valuations - particularly CBA's - leave less margin for disappointment. At the same time, falling housing activity and weaker mortgage applications suggest that bank earnings growth may become harder to sustain. The Big Four account for more than 70% of Australia's mortgage market and around 24% of the ASX 200, making this particularly important for index investors.
There is also an emerging contrast between quality and valuation. Companies such as CBA and Wesfarmers demonstrate the value of high-quality franchises, while BHP demonstrates the potential of structural commodity themes. CSL highlights the opportunity that can emerge when a high-quality company goes through a period of earnings disruption.
At the same time, Australia's broader economic backdrop is becoming more challenging. House prices fell for the fifth consecutive month in August, while concerns about renewed inflationary pressure have increased the possibility of further RBA tightening.
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