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Speaker 1: Welcome to Fear and Greed Q and A where we

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Speaker 1: ask and answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Michael Thompson, and today three lessons from reporting season.

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Speaker 1: We've just gone through one of what appears to have

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Speaker 1: been one of the most volatile earning seasons certainly that

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Speaker 1: I've seen in recent times, with huge share price swings

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Speaker 1: for some very very large companies. Roger Montgomery is the

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Speaker 1: founder and chief investment officer at Montgomery Investment Management. Remember

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Speaker 1: this is general information only. You should seek investment advice

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Speaker 1: before making decisions. Roger, Welcome back to Fear and Greed

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Speaker 1: Q and A.

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Speaker 2: Good to be with you, Michael.

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Speaker 1: Was this the most volatile that you've seen?

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Speaker 2: Look? Yeah, you know what was interesting that the you know,

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Speaker 2: in aggregate, the split between companies beating and missing earnings

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Speaker 2: expectations was about even which is a bit of a

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Speaker 2: loss of momentum from previous years. And so the consequence

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Speaker 2: of that was that at the periphery or at the

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Speaker 2: tail of that even match, you had companies that did

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Speaker 2: a lot worse or a lot better, and consequently share

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Speaker 2: price has reacted accordingly. I think there's also that uncertainty

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Speaker 2: around Tariff's, uncertainty around Trump, uncertainty about the benefits of AI,

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Speaker 2: which has been priced in to markets. Maybe not the

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Speaker 2: Australian market as much as the US, but of course

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Speaker 2: we've risen in sympathy and consequently that means the market

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Speaker 2: is vulnerable to any upsets.

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Speaker 1: You mentioned. Share price is reacting accordingly in terms of

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Speaker 1: either hits or misses. Was it in proportion or these

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Speaker 1: swings and moves just completely out of proportion.

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Speaker 2: Yeah, Look, and the stuff that we're talking about is

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Speaker 2: that the record high share price volatility is driven by

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Speaker 2: a few things. Number one that you know, the rise

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Speaker 2: of passive investing. There's a lot of quantitative trading, and

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Speaker 2: as always, there were some outdated earnings estimates where companies

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Speaker 2: hadn't provided a more recent guidance, and consequently the market

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Speaker 2: was a bit taken aback by the results.

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Speaker 1: Okay, now I want to love a good list, So

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Speaker 1: we're going to put together the list of the three lessons,

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Speaker 1: the three things that we can take away from this

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Speaker 1: earning season. What's the first lesson that we should learn

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Speaker 1: from this?

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Speaker 2: Well, I think the first one is that the economy

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Speaker 2: is shifting or what we've seen from results is that

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Speaker 2: the economy is shifting from being resilient, which is a

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Speaker 2: word we've used a lot recently, certainly since the pandemic,

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Speaker 2: to early signs of a recovery. Consumers are responding positively

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Speaker 2: to easier financial conditions, for example, lower interest rates and

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Speaker 2: stabilizing inflation. We've seen improved sales updates since June thirty

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Speaker 2: so companies like Harvey Norman have said that Y twenty

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Speaker 2: six is off to a strong start. The same can

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Speaker 2: be said for Super Retail Group, which owns Super Cheap,

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Speaker 2: Bordo and Rebel JB. High Fire is doing well in Australia,

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Speaker 2: as is the Good Guys and Nick Scarali's off to

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Speaker 2: a very good start you with good orders early in

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Speaker 2: the year. So you know, we've seen the sales updates

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Speaker 2: relatively optimistic, and most consumer discretionary stocks showed beats. In

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Speaker 2: other words, they beat expectations and that was driven by

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Speaker 2: a rebound in spending on non essential items.

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Speaker 1: Okay, all right, so that's the first one we are

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Speaker 1: seeing that shift in the economy. What's the second lesson.

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Speaker 2: Earning's revisions, there's actually a slight downward tilt to those

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Speaker 2: revisions analysts have skewed modestly negative, and so there's actually

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Speaker 2: five upgrades for every six downgrades, and the middle stock

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Speaker 2: or what we call the median stock, had a negative

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Speaker 2: point four percent downgrade to their estimates, and the upgrades

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Speaker 2: were about two point four percent on average, whereas the

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Speaker 2: average downgrade was minus four percent. So yeah, that'd be

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Speaker 2: another takeaway.

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Speaker 1: Okay, And the third one.

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Speaker 2: That's really good. I think I think it's fair to

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Speaker 2: say that the market performed well during reporting season, but

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Speaker 2: it probably can't be attributed to the results. And I

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Speaker 2: think what we've got is a balanced outlook domestically. So

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Speaker 2: we've got some recovery signs, but we've also got some

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Speaker 2: inconsistencies and external uncertainties and those you know, those are

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Speaker 2: as I mentioned a moment ago, Trump Tariff's geopolitical uncertainty,

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Speaker 2: and so that none of that has left investors' minds

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Speaker 2: when they look at the results. Having said that, though

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Speaker 2: we also saw that small caps are out performing large caps.

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Speaker 2: They haven't done that for a few years, but it

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Speaker 2: now appears to be starting to happen.

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Speaker 1: So after a number of years of predicting the year

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Speaker 1: of the small cap, it might finally be upon right.

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Speaker 2: It's already happening. In fact, small caps have been out

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Speaker 2: performing bigs for a little while now.

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Speaker 1: Now in terms of then if we look at some

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Speaker 1: specific stocks, biggest hit, biggest miss of earning season, what

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Speaker 1: was the big success story do you think?

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Speaker 2: I think it's hard to put it down to one,

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Speaker 2: but you know, I think the retailers, so Nick Scarley,

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Speaker 2: for example, really impressive Australian sales momentum in Australia and

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Speaker 2: New Zealand that continued into July. That reflects a couple

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Speaker 2: of things, really strong product launchers, but also that can

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Speaker 2: improved consumer sentiment that I mentioned earlier. And we think

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Speaker 2: they're doing a great job over in the UK as

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Speaker 2: well with their fab furniture rebranding and restocking with Nick

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Speaker 2: Scarley product. In the stores where they're actually putting in

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Speaker 2: Nick Scarley products, those Nick Scarley products are the fastest

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Speaker 2: and best selling items over there. I think the miss,

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Speaker 2: you know, probably goes down to some of the non

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Speaker 2: discretionary retailers, you know, the Woolworths of the world. That

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Speaker 2: was a pretty disappointing result and they've got you know

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Speaker 2: that the word recovery is being bandied about in terms

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Speaker 2: of business strategy for Woolworths. You know, it's not something

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Speaker 2: I think many investors would have expected to see. But

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Speaker 2: this is a business now that's struggling and needs to

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Speaker 2: do a lot to recover. It's probably going to take

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Speaker 2: a couple of years.

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Speaker 1: What about some of these big ones with US exposure

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Speaker 1: like James Hardy and CSL. There's some big, big drops there.

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Speaker 2: Yeah, and that was a feature of that was a

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Speaker 2: feature of reporting season that companies with US exposure, especially

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Speaker 2: exposure to the use US housing industry or housing market,

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Speaker 2: they suffered. That's true.

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Speaker 1: Okay, Now one final message, and I suppose this is

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Speaker 1: more to the retail investors, the mom and dad investors

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Speaker 1: that have seen the headlines from earning season where you've

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Speaker 1: had companies the share price going up or down twenty percent,

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Speaker 1: twenty percent plus in a single day. Is it something

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Speaker 1: then to be wary of? Is it going to make

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Speaker 1: people more concerned about investing or is there a lesson

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Speaker 1: here for them about not trying to pick stocks?

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Speaker 2: Yeah? I think if you've I think if you've got

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Speaker 2: a long term horizon, so if you're thinking about you

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Speaker 2: always should be thinking about investing. Like you invest in

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Speaker 2: a business, if the business was unlisted, you wouldn't be

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Speaker 2: worried about day to day moves in the stock price

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Speaker 2: because the company wasn't listed. What are the things that

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Speaker 2: you'd be looking at to see whether it's going well.

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Speaker 2: You want to know that revenue is growing, you want

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Speaker 2: to know that profits are going you want to know

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Speaker 2: that there's room to cut costs and improve profitability as well.

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Speaker 2: And so they're the things to be looking at. And

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Speaker 2: if you're following that and you own quality businesses, then

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Speaker 2: your time horizon is going to be five years plus.

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Speaker 2: So the intra day volatility that you're referring to really

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Speaker 2: should be neither here nor there. There's going to be

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Speaker 2: more of it. You could see that as a risk,

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Speaker 2: but you can also see it as an opportunity.

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Speaker 1: Yeah, one last question, Actually, I know I said that

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Speaker 1: was the last one, but I'm going to squeeze one

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Speaker 1: more in outlook for the next twelve months. Where are

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Speaker 1: we going to be this time next year?

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Speaker 2: It all comes down to one thing, and that is liquidity.

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Speaker 2: So while liquidity is going up, central bank global central

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Speaker 2: bank liquidity is rising, which it is at the moment.

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Speaker 2: As long as that's the case, then what you're going

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Speaker 2: to find dips will be short lived and the market

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Speaker 2: will bounce. If that liquidity starts to turn over, and

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Speaker 2: the expectation is that could happen sometime next year, then

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Speaker 2: you know it might be time to rebalance portfolios.

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Speaker 1: All right, Roger, thank you for talking to Fear and Greed.

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Speaker 2: Always a pleasure, Michael.

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Speaker 1: That was Roger Montgomery, founder and chief investment officer and

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Speaker 1: Montgomery Investment Management. Just a reminder to please seek professional

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Speaker 1: advice before making investment decisions. And if you've got something

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Speaker 1: that you would like to know, something you would like

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Speaker 1: us to dig into on this podcast, and please send

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Speaker 1: through your question on LinkedIn, Instagram, Facebook, or at Fearandgreed

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Speaker 1: dot com dot au. I'm Michael Thompson in this sphere

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Speaker 1: and grade Q and A