10k Words

Equitable Investors

September 2025

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Record volatility amid an ASX reporting season delivering another year of flat-to-negative growth. Australian GDP in the June quarter compared well with peers but on a per capita basis things have been going backwards since Q4 2022. Things have been going more backwards for the Alcohol & Tobacco space (and related ASX listings). Back on equities, large cap and momentum were leading factors in the US over the past 12 months (the AI theme having a bit to do with that) but in Australia it is small caps out in front. US smalls - and also bonds - remain in lengthy drawdown periods. Looking more broadly, delinquencies in the US office CMBS sector have been on the rise, while a large portion of private equity buy-out holdings are in breach of leverage caps. Finally, take a look at the price of diamonds falling away.

September 2025 Edition

 

ASX reporting season featured record result-day share price volatility

 

Source: Wilsons

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Three years of flat-to-negative earnings growth in Australia projected to end in FY2026

 

Source: Wilsons Advisory

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Australian gross operating profits: mining industry v the rest

 

Source: IFM Investors, ABS

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June 2025 quarter GDP growth - quarterly change annualised

 

Source: Macrobond, AMP

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Real & real per capita growth in GDP

 

Source: IFM Investors

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Australian household spending - alcohol & tobacco has been in decline for ~24 months

Source: Evans & Partners

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Performance of ASX-listed alcohol stocks

 

Source: Koyfin, Equitable Investors

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US factor ETF performance / S&P 500 ETF performance over past 12 months

 

Source: Koyfin

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ETFs tell a bit of a different story on the ASX over the past 12 months

 

Source: Equitable Investors

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AI "Picks & Shovels" Equal Weight Index - rebalanced monthly

 

Source: Bespoke

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Number of says since Russell 2000 (US small cap index) last surpassed its prior high (drawdown)

 

Source: Charles Schwab

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Number of months since Bloomberg Aggregate Bond Index last surpassed its prior high (drawdown)

 

Source: Creative Planning, @CharlieBilello

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US Office CMBS delinquency rate (%)

 

Source: Trepp, The Kobeissi Letter

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% of private equity buyout holdings in breach of leverage caps

 

Source: MSCI, Bloomberg via Advisor Perspectives

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Diamond prices in decline

 

Source: IDEX

Funds operated by this manager:

Equitable Investors Dragonfly Fund

Disclaimer

Past performance is not a reliable indicator of future performance. Fund returns are quoted net of all fees, expenses and accrued performance fees. Delivery of this report to a recipient should not be relied on as a representation that there has been no change since the preparation date in the affairs or financial condition of the Fund or the Trustee; or that the information contained in this report remains accurate or complete at any time after the preparation date. Equitable Investors Pty Ltd (EI) does not guarantee or make any representation or warranty as to the accuracy or completeness of the information in this report. To the extent permitted by law, EI disclaims all liability that may otherwise arise due to any information in this report being inaccurate or information being omitted. This report does not take into account the particular investment objectives, financial situation and needs of potential investors. Before making a decision to invest in the Fund the recipient should obtain professional advice. This report does not purport to contain all the information that the recipient may require to evaluate a possible investment in the Fund. The recipient should conduct their own independent analysis of the Fund and refer to the current Information Memorandum, which is available from EI.

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Turning Turbulence into Triumph:

Two Stocks Mastering Market Themes

Alphinity Investment Management 

June 2025

6 minutes read time

Five powerful themes are reshaping the investment landscape, creating winners and losers across global markets. The AI revolution stands as the defining narrative, driving fundamental shifts in capital allocation and valuation frameworks. Lower interest rate expectations and regulatory reform have reignited investor confidence, while Trump's tariff agenda injects supply chain uncertainty and continues to impact both corporate margins and consumer spending power. Meanwhile, geopolitical tensions fuel unprecedented defence spending and strategic consolidation as companies position for an increasingly fragmented world.

These converging forces created a tale of two markets during 2Q25 earnings season. On the surface, the numbers appeared robust: over 80% of US companies beat earnings expectations, guidance upgrades accelerated to double the 1Q25 rate, and consensus pushed earnings growth forecasts to an impressive 11% and 13% for 2025 and 2026 respectively. Yet beneath this veneer of strength lay a more complex reality. Earnings growth concentrated heavily within just three sectors and performance diverged sharply among industry peers.

This bifurcated landscape has created an unforgiving environment where execution excellence separates winners from casualties. Companies skilfully navigating these themes are thriving, while those stumbling face harsh consequences. Two high quality companies with underappreciated earnings potential that exemplify this successful navigation are Amphenol and O'Reilly Automotive, transforming market complexity into competitive advantages and turning potential headwinds into powerful tailwinds through exceptional strategic execution. 

US 2Q25 Reporting Season - Strong overall growth of 12%, but largely driven by 3 sectors

Five Themes Defining Corporate Performance

The recent reporting season once again highlighted these five powerful themes that continue to reshape the investment landscape and define how companies are adapting to the current environment. Below, we examine how these themes have evolved and intensified through the latest earnings cycle:

• AI From Speculation to Implementation - While AI mentions remain near historic highs, corporate discourse has evolved from speculative possibilities to concrete implementation strategies. Management teams are increasingly providing detailed progress updates and specific use cases rather than broad theoretical benefits, though most companies acknowledge they remain in the early stages of realising meaningful productivity gains.
• Defence Modernisation Acceleration - Global defence expenditure has surged amid a pronounced strategic pivot toward deterrence capabilities and military modernization. NATO member commitments are escalating from 2% to targeted 3.5-5% of GDP by 2030, exemplified by Germany's €500 billion defence infrastructure fund. Global defence spending is projected to expand at 9% annually from a $2.5 trillion baseline.
• Tariff Adaptation Strategies - The shift from uncertainty to operational reality has prompted comprehensive corporate responses across multiple fronts. Three-quarters of affected companies are actively restructuring supply chains and renegotiating supplier agreements, while over half are implementing customer price pass-throughs. Strategic import frontloading ahead of tariffs has complicated near-term financial interpretations.
• Strategic M&A Consolidation - Acquisition activity has intensified with a pronounced focus on strategic technology capabilities rather than traditional scale benefits. Well-capitalised companies with proven execution capabilities are pursuing disciplined transactions targeting AI competencies, industrial consolidation opportunities, and infrastructure enhancement despite broader economic uncertainties.
• Consumers Not out the Woods yet - Despite some recovery from the prior quarter's sharp deterioration, consumer sentiment remains fragile with management guidance pointing to a challenging second-half outlook. Real consumer spending growth is projected at just 1% annualised through H2 2025, driven by softer employment growth, tariff-induced inflation, and scheduled transfer payment reductions. This environment favours companies with defensive, non-discretionary revenue streams as price-sensitive consumers prioritise essential spending.

Increased confidence in corporates' ability to mitigate tariff headwinds

Quality in Action: Two Exceptional Operator

Among the winners emerging from this challenging environment, two companies showcase exceptional strategic positioning across multiple themes. Amphenol and O'Reilly Automotive have not merely survived current market forces--they have actively leveraged them to strengthen their competitive moats, accelerate growth, and deliver consistent outperformance through disciplined execution and opportunistic capital deployment. 

Amphenol: Wired for AI, Armed for Defence, Primed for M&A

Amphenol, a leading connector and fibre optics supplier with 12% global market share, sits perfectly at the intersection of three key themes: AI infrastructure buildout, defence spending acceleration, and strategic M&A activity.

AI Content Multiplication Amphenol expects to grow at 2x their end markets due to significant content uplift in AI applications. Unlike traditional data centres

, AI requires every chip to be interconnected, creating multiples of connections. This structural advantage delivered exceptional Q2 2025 results--revenue beat expectations by 11% and EPS by 21%. Management noted AI customers "continue to spend with no one slowing down investments."

Strategic M&A Execution The $10.5 billion CCS acquisition exemplifies Amphenol's disciplined M&A approach in today's active dealmaking environment. Acquired at a reasonable 11x EBITDA, CCS brings $3.6 billion in expected 2025 sales at 26% EBITDA margins. The deal adds complementary fibre capabilities with minimal overlap to existing operations. With leverage remaining under 2x and management's proven integration track record (13% annual revenue growth over five years, 2x their end markets), this represents smart capital deployment in an M&A-friendly market.

Defence Expansion The $300 million acquisition of Narda-MITEQ, a leading provider of active RF and microwave components, expands Amphenol's existing defence exposure.  This positioning capitalizes on unprecedented global defence spending increases driven by geopolitical tensions and deglobalization trends.

Structural Margin Expansion Management raised conversion margin targets from 25% to 30%, citing better pricing power as technology complexity increases. This adds a new earnings growth lever beyond their traditional organic growth, M&A, and buyback strategy.

Attractive Valuation Trading at 30x CY26 EPS versus the S&P 500's 21x, Amphenol's market premium sits at the lower end of its historical 40-85% range despite earnings growing 40-50% above average years. The combination of AI content multiplication, strategic M&A execution, and defence market expansion positions Amphenol as a clear beneficiary of three of today's dominant investment themes.

Amphenol - Strong earnings upgrade cycle underpinned by multiple growth levers and pricing power

O'Reilly's Wide Consumer Moat Meets Supply Chain Mastery

O'Reilly demonstrates how best-in-class operators are able to turn challenging conditions into competitive advantages. As a leader in the automotive aftermarket industry with 6,200 stores, the company benefits from non-discretionary vehicle maintenance demand while demonstrating superior tariff navigation.

A Resilient Industry The automotive aftermarket's structural advantages shine during uncertainty. Vehicle repairs remain essential regardless of economic pressures, with aging U.S. vehicle fleets and rising light truck penetration driving sustained demand. O'Reilly's dual-market strategy serves both DIY consumers (52% of sales) and professional mechanics (48% of sales), providing diversified exposure to recession-resistant spending.

Tariff Management Excellence With 20-30% of costs sourced from China and 10-15% from Mexico, O'Reilly faces meaningful tariff exposure but has demonstrated exceptional pass-through ability. Same-SKU inflation accelerated from 0.5% in Q1 to 1.5% in Q2 2025, with management seeing "substantially more" pricing power potential than currently embedded in guidance.

Solid Execution O'Reilly delivered strong second-quarter 2025 earnings, growing comparative sales by 4.1% (beating expectations of 3.7%) and expanding its gross margin by 70 basis points. Despite elevated SG&A spending, management raised full-year comparative growth guidance to 3-4.5% from prior 2-4%, suggesting conservative positioning with upside potential.

Widening Competitive Moat O'Reilly's unrivalled distribution network--30 distribution centres and 385 hub stores enabling 5-night weekly delivery--provides superior service versus struggling competitors. With NAPA facing operational challenges and Advance Auto Parts in financial restructuring, O'Reilly is well positioned to continue capturing market share in a consolidating industry.

The combination of defensive demand, tariff-induced pricing tailwinds, and market share opportunities positions O'Reilly for sustained outperformance as macro headwinds become competitive advantages.

O'Reilly enjoying superior earnings growth relative to key peers over the last decade

Navigating Complexity Through Strategic Selection

Today's investment landscape rewards execution excellence while punishing missteps, as these five forces--AI implementation, defence modernisation, tariff adaptation, strategic M&A, and consumer resilience--create clear winners and losers even within sectors.

Success requires identifying companies that transform these forces into competitive advantages. Amphenol capitalizes on AI content multiplication and executes disciplined defence acquisitions, while O'Reilly turns tariff headwinds and consumer pressure into earnings and market share gains.

As earnings dispersion widens and market patience diminishes, broad sector exposure is insufficient. Investors must focus on best-in-class operators with proven execution capabilities and structural competitive advantages. In this bifurcated environment, owning quality companies like Amphenol and O'Reilly provides both defensive characteristics and offensive growth potential, positioning portfolios to benefit from, rather than merely endure, the forces reshaping the global economy.

Editorial Note:
The company performance figures cited in this article reflect results available at the time of writing and are included as illustrative examples. The broader insights--on structural themes, market sentiment, and investment frameworks--remain relevant beyond these numbers and are intended to inform long-term investment thinking.

Funds operated by this manager:

Alphinity Australian Share Fund , Alphinity Concentrated Australian Share Fund , Alphinity Sustainable Share Fund , Alphinity Global Equity Fund , Alphinity Global Sustainable Equity Fund

This material has been prepared by Alphinity Investment Management ABN 12 140 833 709 AFSL 356 895 (Alphinity). It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Any projections are based on assumptions which we believe are reasonable but are subject to change and should not be relied upon. Past performance is not a reliable indicator of future performance. Neither any particular rate of return nor capital invested are guaranteed.