ASX reporting season set to see slowdown in corporate earnings this August

Investors are being warned to brace for a slowdown in corporate earnings when reporting season starts this week, elevated costs and inflationary pressures cripple earnings.

Earnings season will offer further insight into how consumers are holding up. Picture: Monique Harmer

Australia’s top companies face lower profits this earnings season as a cocktail of high interest rates, elevated costs and economic uncertainty puts the brakes on strong growth.

Company results for the 2024 financial year are expected to show further signs of household stress, particularly in a soft fourth quarter, with at-home consumption outperforming out-of-home.

Market forecasts are for an average profit fall of 4 per cent among ASX companies over the 12 months to June 30, compared to the previous period. Analysis from stockbroker Morgans shows forecast earnings per share (EPS) growth for the financial year has slid to 6 per cent from previous expectations of 7 per cent, while it expects the S&P/ASX 200 will return to steady earnings growth of 5.8 per cent in FY25, and 7.8 per cent for EPS.

Jun Bei Liu, lead portfolio manager of Tribeca’s Alpha Plus Fund, said this coming reporting season would be one of the softer reporting seasons in recent times. “Company revenue will be under more pressure and margins will continue to move lower, given the slowing economic activity and higher inflation,” she said.

“We are expecting consumer-facing companies, such as retailers, to report in line with expectations, as many have already downgraded. It is likely the first six weeks’ trading update will be softer than expected.”

The portfolio manager added markets expected cautious outlook statements from companies with higher costs, as freight costs in particular have risen significantly.

Credit Corp will be the first cab off the rank on July 30, while Centuria Industrial REIT, Rio Tinto, Pinnacle Investment Management, Block and ResMed are among the other names to report this week.

Markets will be watching to see whether tax cuts are working to lift consumption. Picture: Monique Harmer

Modest falls are expected in materials amid easing iron ore prices. Financials company earnings could dip, while utilities are likely to enjoy profit growth after a catch-up rise in retail electricity prices compared to wholesale pricing. Healthcare and industrials are also forecast to book profit gains.

August will offer an insight into how the Australian consumer is faring as household budgets are squeezed. It is expected to mark the turning point for consumers, with a stronger 2025 fiscal year on the cards amid slowing inflation, tax cuts and rising wages.

“The consumer has been relatively soft over the second half (FY24), but market expectations are for a challenging period. We do believe momentum into FY25 has improved,” Macquarie analysts said.

They said Woolworths and Coles would face lower food inflation but would also see continued pressure on the cost of doing business as wages, rents and utility costs continue to rise.

“This could weigh on the outlook for margins into FY25,” the analysts said in a note.

AMP chief economist Shane Oliver said the reporting season would provide some early indications on how consumers were responding to the Stage 3 tax cuts introduced on July 1. “The consumer sentiment figures aren’t showing a big rebound, and it’s quite possibly because people don’t realise the tax cuts are there, as about $5 per week is much less noticeable than a lump sum,” he said.

Cost management was the number one talking point during the February reporting season. Many companies reported they were able to pass on costs to consumers and customers.

Dr Oliver said markets ideally wanted to see signs those cost pressures were coming down, and coincided with demand.

“Demand so far has been partly fuelled by population growth, but that growth is fading, so markets will be looking to see if stimulus from tax cuts will help consumer stocks through the year.

“Expectations (for the year ahead) could be dashed if numbers for last year are soft. A lot will depend on the outlook comments from companies and how costs have been handled, given we have seen significant cost pressure over the last few years.”

Dr Oliver said if the message from companies was sales and growth were slowing it was likely there would be more job losses because shareholders tended to demand it.

“They want to take action to maintain margins and profitability as much as possible. If weakness continues, there will be a further downside to cost cutting in the form of job losses,” he said.

This could also weigh on dividends, according to Dr Oliver.

Australian Shareholders Association chief executive Rachel Waterhouse said investors had a sense of optimism the new financial year would see growth and profitability rebound.

“Optimistic is how investors are feeling. We’ve seen banks track extremely well with good share price growth … not everything’s going to be at the same speed of growth.

“There is also a feeling that things are slower than usual as consumers go to shopping centres, and it is just being a bit quieter than usual, and this comes from uncertainty around the direction of interest rates.”

Morgans analyst Alexander Mess said while macro factors remained a key focus, there were stock/sector selection opportunities.

“The key themes to watch include FY25 earnings trends, cyclical signposts, the risk of hiding in large caps, performance of highly shorted stocks and small cap earnings reactions,” he said.

Originally published as ASX reporting season set to see slowdown in corporate earnings this August