Mounting fears over Trump’s tariffs and waning economic growth coincided with a gradual decline in earnings quality to deliver a volatile February reporting season.

Australian corporates in aggregate reported a modest beat to analyst earnings expectations, but misses were sold heavily and stocks with strong share price momentum struggled to sustain it. Buoyed by a strong start to earnings, and the first Reserve Bank of Australia rate cut since November 2020, the ASX300 Index touched record highs in the middle of the month.

However, the rally could not be sustained as steadily weaker results, and a worsening macroeconomic backdrop, drove the ASX300 Index 4.2% lower in February. This is the weakest month since September 2022 and followed a very strong January (+4.5%). Offshore equity markets also sold off on the escalating rhetoric from the Trump administration regarding its trade and tariff policies and the associated concerns over the world economy.

While the market fell and results momentum faded through the month, local company earnings held up primarily due to good margin outcomes. In aggregate, Australian corporates are controlling costs well and some latent pricing power remains to drive topline growth.

Despite the general picture of healthy margins, parts of the economy are still struggling with inflationary pressures and cannot offset them with cost cuts or revenue measures. This was evident in the results from supermarket giant Woolworths, where wage increases, rising food costs, and price-conscious shoppers combined to crimp margins. Kmart and Bunnings owner Wesfarmers also called out expectations for sustained cost pressure in labour, energy and its supply chain.

Parts of the healthcare sector are also under pressure, with margin warnings from pathology providers Healius and Australian Clinical Labs, diagnostic imaging provider Integral Diagnostics, and private hospital giant Ramsay Healthcare. Wage pressure and labour availability are key challenges in health services.

Inflation is easing in Australia and allowed the RBA to deliver its rate cut. But the commentary from some listed companies suggests a sharp drop in inflation is unlikely and the easing cycle will be measured.

On the other hand, Australian consumer demand is patchy and there is deflation in items like airfares and some retail goods. Discretionary businesses such as retail, automotive, and travel delivered a string of downgrades last month, reflecting pockets of weakness in the Australian consumer. Some retailers are having to discount more to generate sales, crimping margins. 

The big movers from an index perspective were the banks. Market updates from the major lenders were innocuous rather than disappointing. Credit growth is healthy, the deterioration in net interest margins and credit quality has been modest, and bad debts remain near historic lows. But following very strong sector performance in 2024 and elevated valuations, the modest earnings growth on offer saw the ASX300 Banks Index shed 5.2% for the month.

The other heavyweight ASX sector, materials, fell 3.2% last month but this was more a function of tough headlines on deteriorating US-China relations, trade wars, and Trump tariffs. Operationally the big miners are performing well, and balance sheets are strong, but the outlook for Australia’s key export – iron ore – looks challenged in the face of a soft Chinese economy and slowing global growth.

By sector, consumer staples, communication services, and industrials performed best, while technology, healthcare, and energy were weakest. Analyst consensus is expecting 8% earnings per share growth in fiscal 2025. The market offers a dividend yield of 3.6% and is trading on a price-to-earnings multiple of 17.9x – slightly elevated against the decade average of 16.1x.

Ultimately, valuations matter, and strong share price momentum becomes a vulnerability when the fundamentals aren’t supportive.