Fewer companies beat expectations in volatile reporting season, triggering profits rethink

A volatile reporting season for corporate Australia is leading analysts to reassess the likely timing of the long-anticipated profits rebound.

Donald Trump’s tariffs on Mexico, Canada and China are due to start on Tuesday and will shake up world markets. Picture: AFP

A volatile reporting season for corporate Australia is leading analysts to reassess the timing of a long-awaited profits rebound.

Some are concerned that market ex-resources valuations were trading in “rarefied air.”

If so, investors may be overpaying for cyclicals when defensive stocks might serve them better.

It started well when the ASX 200 stock index hit a record high of 8615.2 points at the halfway point of the February reporting season, as lower-than-expected inflation data greenlit interest rate cuts.

But by the time the Reserve Bank delivered a widely-expected policy easing in the third week of reporting, analysts were downgrading their earnings estimates for the current financial year by more than usual. By the end of the month the ASX had lost more than 4 per cent.

A 0.9 per cent rebound to 8245.7 points on Monday came after a surprising 1.6 per cent lift in America’s S&P 500, which may have been caused by month-end portfolio rebalancing by index funds.

No doubt it’s a busy week ahead for markets. US tariffs on Mexico, Canada and China are due to start on Tuesday, China’s important National People’s Congress begins Wednesday, Australia’s national accounts data is also due Wednesday and US non-farm payrolls data looms on Friday.

In terms of the ratio of beats to misses in December half-year earnings reports, UBS says it got worse through reporting season due to the “disproportionate challenges that many smaller companies are still feeling”, and that many are still struggling with the effects of high interest rates and inflation.

Bear in mind that smaller companies tend to report towards the end of reporting season.

It was interesting also to see that misses were disproportionately punished by the market.

Companies which beat profit estimates watched their share prices rise by an average of 2 per cent on the day of their reports, while those which missed experienced a fall averaging 5 per cent.

UBS Australia equity strategist Richard Schellbach said this was particularly the case with companies indicating that they had “passed the worst, but are unwilling to up their guidance”.

“Leading into February, we had expected that rate cuts and an improving economic outlook for calendar 2025 would be reflected in more optimistic tones coming from companies,” he said.

“This did not quite play out, and although businesses emphasised that they believe the period of toughest macro has now been passed, they were cautious in their outlooks.

“With the vast majority of companies instead choosing to maintain their forward earnings guidance, it tells us that management is wary of signalling sustained recoveries until they see the current green shoots broaden.

As a result of these revisions, about 1 per cent was shaved off expectations for FY25 and FY26.

The consensus year-on-year EPS growth estimate for the market now sits at minus 0.7 per cent for FY25 and then rises to 8 per cent for FY26.

The downgrade skew was disproportionately driven by lower-than-expected earnings being factored into some large companies in the energy, banking, healthcare and tech sectors.

Mr Schellback said the results-day share price volatility of reporting companies was “unprecedented”, with intraday swings averaging 7 per cent.

On Goldman Sachs’ numbers 38 per cent of reporting companies beat consensus earnings expectations against an average reporting season “beat” of 40 per cent, while 38 missed expectations versus an average of 30 per cent.

“Notably 40 per cent of stocks moved greater than plus or minus 5 per cent on earnings day, capping one of the most volatile earnings seasons since the GFC,” Goldman Sachs equity strategists Matt Ross and Tony Wu said.

Within the Australian sharemarket, a “rolling over of the economic growth cycle” amid concern about US President Donald Trump’s policies, a shift to rate cuts by central banks, and a weakening in US versus China stockmarket sentiment may be contributing to a “change of leadership”, according to Macquarie.

Profit margins were supported by an ongoing focus on cost control and lingering pricing power.

But “we did not get the guidance upgrades we hoped for,” Macquarie’s Australian equity strategist, Matthew Brooks, said.

And while companies with earnings growth momentum were among those which beat market estimates, their shares didn’t outperform the market.

“The nexus between earnings momentum, surprises and price reactions has broken this season,” he said. “On average, stocks with positive earnings momentum did beat, but they did not outperform.

“Meanwhile, those with poor momentum outperformed, even though they had net negative surprises overall.

“The fact that stocks with high short interest outperformed without beats is also significant.

“When you also consider the large underperformance of momentum stocks in recent years, in our view it all points to signs of a market looking to change leadership after a multi-year bull market.”

Mr Brooks saw several signs that investors were “shifting their money” at the start of 2025.

“The nexus between earnings momentum, surprises and price reactions has broken, signalling investors are moving from past winners like banks, to losers,” he said.

“On average, stocks with positive earnings momentum did beat, but they did not outperform.

“Meanwhile, those with poor momentum outperformed, even though they had net negative surprises overall.

“The momentum factor was a key underperformer in February, while stocks with high dividend yields outperformed.

The underperformance of the momentum cohort shows “a market looking to change leadership after a multi-year bull market”.

Combined with strong returns from highly shorted stocks, the recent underperformance of momentum stocks “signals a rotation” and “reflects a market that wants to buy stocks with negative sentiment” and “looking to change leadership after a multi-year bull market,” Mr Brooks said.

He said that investors were “paying a premium for cyclicals when they should be paying a premium for defensives” as the reporting season showed “multiple signs of momentum breaking” in a market with price-to-earnings multiples in “rarefied air”.

“In early 2025, an economic surprise down-cycle caused by the recent spike in yields plus the headwinds from Trump’s policies are two additional factors that could contribute to downgrades in the near term,” he said.

“On the plus side, the recent RBA rate cut should also support earnings, but related upgrades may be more likely in FY26.”

Originally published as Fewer companies beat expectations in volatile reporting season, triggering profits rethink