Australia’s largest companies face another year of falling profits
Australia’s biggest companies are tipped for a third consecutive year of falling profits, with an expert warning the market is overvalued and ‘something has to give’.
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Australia’s blue chip companies’ profits are tipped to fall for a third year in a row, with investors warned that eventually “something has to give”.
In its latest investment note, Morningstar said the top end of the Australian market could be overvalued, with earnings not keeping up with share price growth.
Morningstar predicts the ASX 200 “earnings recession” will continue with Australia’s largest companies profits falling by one per cent in the 2025 financial year.
This follows falls of 10 per cent in 2023 and four per cent last year.
Morningstar market strategist Lochlan Halloway said while the other index continued to rise, Australia’s largest businesses — from an earnings point of view — were actually falling.
“Eventually, something’s got to give — either earnings catch up to lofty prices, or valuations rebase to reflect the reality of slower growth,” Mr Halloway said.
“This disconnect between prices and profits goes a long way to explaining why valuations look so stretched at the top end of the market.
The warning comes as businesses are set to release their June 30 results throughout the month of August.
According to Morningstar, the results could be bleak with the ASX 20 earnings tipped to fall by a cumulative 15 per cent in the three years until 2025.
Despite the businesses themselves falling, share prices for the ASX 20 as a collective is up 30 per cent over the same period.
By Morningstar’s estimations, the ASX 20 is currently running at a premium of about 20 per cent compared to fair value — a level that has rarely been seen in the past decade.
Mr Halloway said the main culprit would be the mining stocks, which would once again soften due to weaker commodity prices following the post-Covid boom.
“Financials, our largest sector, should deliver modest growth, but mid-single-digit gains aren’t nearly enough to offset the miners’ slump,” he said.
The call comes as the Australian sharemarket pushed to a new record high over the past week, with markets ignoring tariff uncertainty and weaker local economic data.
As of 3.30pm on Friday, the ASX was up 2.2 per cent for the week — its strongest gains since April 10.
AMP chief economist and head of investment strategy said the Australian market jumped on the news of softer jobs data, which left the RBA on track to cut rates again in August.
“With unemployment breaking to its highest since the pandemic, and June jobs data showing broad-based weakness, it’s now hard to describe the labour market as tight,” he wrote in an investment note.
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