Investors better buckle up.
Fund managers are expecting great things from the ASX's resource sector this reporting season, as well as more fierce volatility.
August's full-year reports were perhaps the most strained and unpredictable in recent memory, as even blue-chip stocks like Woolworths, CSL, James Hardie and Sonic Healthcare got whipsawed after earnings misses.
And more of the same is expected as companies release their half-year results in February.
"Last reporting season was probably the most ... I've seen and I probably would have said that about the one prior," according to Tim Carleton, founder and chief investment officer at Sydney-based Auscap Asset Management and a 20-year veteran of the financial services industry.
For example, Sonic Healthcare shares plunged 12 per cent on August 21 after Australia's largest pathology chain missed earnings expectations by just one per cent.
"That's an extraordinary reaction for a ASX50 company that really didn't do anything wrong or different to what the market was expecting," Mr Carleton said.
He says such extreme reactions were driven by a smaller pool of active fund managers and the rise of "quant traders" who use algorithms and mathematical models to manage their portfolios.
Based at hedge funds, investment banks and proprietary trading firms, those quant traders will see that small earnings downgrade as a signal to sell their shares, Mr Carleton said.
"If they're all trying to rush through a small exit and there's not an obvious, logical buyer on the other side of that, which there isn't, then you'll get these overreactions," he told AAP.
That creates opportunities for active fund managers to buy the dip, he notes.
Meanwhile, SG Hiscock portfolio manager Hamish Tadgell sees a surge in commodity prices and upgrades across the resources sector as having lifted expectations for earnings growth this season.
Resources now account for two-thirds of expected earnings per share growth in 2025/26, he said.
"Resources earnings growth is running at around 15 per cent and we expect the positive trends around commodity pricing and currency support to flow through to results," he said.
Commodities including gold, silver, copper, tin, the lithium ore known as spodumene and the uranium ore known as yellowcake all increased sharply in 2025, driven in part by a weaker US dollar.
The rally for gold, silver and copper dramatically continued in January and oil prices have also rebounded, although iron ore has been steady.
Mr Tadgell said aluminium and copper producers are particularly well positioned, given the constraints around creating supply and increased demand for both metals.
However he expects cost pressures will remain a key theme, particularly for companies with limited pricing power.
“Rising wages, energy and input costs continue to challenge margins,” he said.
Consumer-facing companies like Rebel and Supercheap Auto owner Super Retail Group, electronics chain JB Hi-Fi, 4x4 accessory manufacturer Arb Corporation and furniture e-retailer Temple & Webster have all called out the need for higher promotional activity and discounting to stimulate demand and drive sales, he said.
Like Mr Carleton, Mr Tadgell expects the volatility around individual stocks to remain pronounced.
That can work two ways, though, and he said that could be the potential for outsize upwards moves among beaten-down quality growth stocks if they could demonstrate that their underlying business fundamentals remained intact.
There's also been quite a bit of CEO turnover the past six months.
Mr Tadgell noted the likes of carsales.com owner Car Group, realestate.com.au owner REA Group, Penfolds owner Treasury Wine Estates, Dan Murphy's owner Endeavour Group, Domino's Pizza Enterprises, Rio Tinto and South32.
For new chief executives delivering their first earnings results with their current company, it will be an important time to set direction and reset expectations, Mr Tadgell said.
He cited Resmed, Aristocrat Leisure and Light & Wonder as three companies trading at reasonable earnings multiples and strong price-to-growth characteristics, as well as Seek as a potential growth candidate.
