The profit season shock that no one saw coming

Among the usual disappointments and delights of the half-year earnings season, there has been one standout positive shock – that earnings growth across the ASX 200 is booming, and big listed companies’ profits are now forecast to rise almost 13 per cent for the full year.

It represents a volte-face on the past three years of profit falls.

Only six months ago and in the wake of the full-year 2025 earnings, analysts were pencilling in profits in 2026 would rise by a meagre 3 per cent.

But as we are now nearing the end of the February period when companies report their results for the first half of the financial year, our companies’ earnings in aggregate have significantly outperformed.

In particular, many of our large and heavy index-contributors hit the profit ball out of the expectations park and fewer of the big names disappointed.

Just as importantly, it has been largely accompanied by optimistic commentary on the profit outlook, which in turn has sent investment banking experts back to their models to revise up the estimates for the full year to June 30, 2026.

“We note that the upward momentum in earnings revisions for the ASX200 is currently running at its strongest since mid-2022,” said experts at investment bank UBS.

We are now more than 80 per cent through the earnings season and the ratio of companies beating profit expectations against those missing them is sitting at two to one, according to analysis from UBS.

And AMP chief economist Shane Oliver noted that the Australian sharemarket is getting a big push along from company earnings rising again after three years of falls post-COVID.

It’s a positive sign for the Australian economy whose consumers and businesses showed spending and investing strength in the six months to December 2025.

And it also augurs well for the performance of our sharemarket for the remainder of the calendar year, but that prediction comes with the heavy caveat that we take our lead from the US market which is in turn influenced by the erratic policies of Donald Trump.

How he ultimately responds to the US Supreme Court’s decision that the majority of his tariffs are unlawful is predicted to add a new layer of uncertainty to the US equity market.

Meanwhile, the big Australian banks have led the local earnings performance charge – chief among them was the Commonwealth Bank which delivered an earnings master class. It was followed by strong quarterly profits from ANZ, Westpac and a bumper performance from National Australia Bank.

The banks’ earnings have been charged by a boom in credit growth (new lending), a general improvement in margins and a continued experience of benign bad debts.

Miners also had a strong half anchored by BHP which experienced stronger iron ore and copper prices during the six months to December and an unexpected bonus from a deal involving its silver business.

The company was one of several that marked the result by rewarding shareholders with a big lift in dividends – which is generally a sign of optimism for future performance.

There was also an increase in share buybacks among listed companies – which is a demonstration of balance sheet strength.

Retail stocks were something of a mixed bag but two of the larger players, Wesfarmers and JB Hi-Fi reported strong results.

However, discretionary retail may come under some pressure in the current half as a result of a rate rise and the potential for at least one more before June.

Macquarie analysis noted that the previously unloved defensive stocks like utilities had their moment in the sun during reporting season. In particular Telstra, which reaped the rewards of cost-cutting and a strong mobile performance to lift profit by 8 per cent, was a star of the reporting season.

CSL was a notable exception, among the important index players. Its weak earnings performance and the replacement of its chief executive was punished by investors who immediately sold off its shares by 5 per cent.

The only large companies that could significantly move the dial on reporting season performance and that are yet to report are the supermarket giants, Coles and Woolworths, both of which report their results later this week.

Their half-year earnings are expected to be positive but will also be contentious given they are currently under the spotlight of a legal action from the Australian Competition and Consumer Commission accusing them of misleading customers with fake discounts.

Perhaps this is not the time to hit earnings out of the ballpark.

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