What earnings season will tell us about the year ahead

As the latest inflation data paving the way for a February interest rate cut, Trump 2.0 and the frenzy around artificial intelligence dominate market headlines, Australian investors might be forgiven for feeling a little distracted.

It’s a noisy backdrop heading into this month’s earnings season, where some of Australia’s biggest ASX-listed companies will report their financial results for the December half; update investors on their outlook; and provide commentary for what the rest of the year could look like.

The Australian sharemarket remains steady ahead of corporate earnings season.Credit: Dominic Lorrimer

A trickle of results is coming this week, including from real estate listing giant REA Group, Kerry Stokes-backed Beach Energy and furniture retailer Nick Scali, before a deluge of earnings announcements from corporate giants over the rest of the month.

As companies prepare to reveal their numbers, fund managers and strategists are making their predictions and reviewing the big themes likely to shape 2025.

Retail resilient, but shoppers want discounts

The financial health of households is likely to be one of the biggest talking points for investors this earnings season. Some are betting squeezed consumers are finally ready to loosen their purse-strings after last year’s tax cuts and the slowdown in inflation, boosting the share prices of key discretionary retailers. Even so, recent profit downgrades from the likes of Myer and Premier Investments show it’s a mixed picture.

Ten Cap founder and portfolio manager Jun Bei Liu said investors were entering earnings season in a “reasonably optimistic” mood. She said the retail sector had been resilient over the Black Friday and Christmas shopping period.

“We’ve seen data points and feedback from the Boxing Day and Cyber weekend. The consumer [sector] is picking up quite a bit. However, people are responding to discounts,” she said. “Quite a few retailers’ share prices like JB Hi-Fi are tracking at all-time highs, because people are responding to discounts, so as long as retailers can manage to discount well, these businesses will do well.”

Bargain-hungry Australians forked out $1.3 billion at shopping centres and stores on Boxing Day last year, tapping into their shrinking personal budgets to spend on household items.

Commsec market analyst Steven Daghlian said the retail sector had shown “impressive resilience” in 2024 given the backdrop of cost-of-living pressures, biting interest rate rises and formidable competition from international players.

Daghlian noticed a trend in retailers discounting earlier “to get people through the door” to fuel occasions such as Black Friday.

“Data from November shows that there was the biggest lift in spending in 10 months,” he said. “Even though the spending lift maybe wasn’t as strong as anticipated, there were still gains across department stores, clothing, footwear, accessory retailing. The test is going to be whether that momentum continues.”

Daghlian said that last year, JB Hi-Fi, Adairs and Wesfarmers stocks were up 74 per cent, 49 per cent, 25 per cent respectively, and jewellery chain Lovisa was up more than 20 per cent.

However, not all retailers had a strong 2024. Heavyweights such as Woolworths and Dan Murphy’s owner Endeavour were down last year. Fashion retailer Mosaic Brands, which went into administration last year, will close all its brands including Noni B and Millers after managers and receivers for the business failed to find a buyer.

Daghlian said Australians were becoming more “value conscious” and pickier with their products, which could crunch the margins of retail businesses.

“They’re taking advantage of discounted items and sales and supermarket branded products, et cetera,” he said. “That’s something that can be a negative for margins, and obviously it just reflects that people, or some households, are still doing it a bit tough and changing their spending habits a little.”

Are banks overvalued?

Mark Freeman, managing director of AFIC, the country’s largest investment company and a major investor on the ASX, said the outlook for earnings season was mixed.

“There are some areas of the economy that have held up well and there are clearly some pressures in others,” he said. “I think the market has been anticipating a rate cut, but there still seems to be some persistent inflation.”

Freeman said Australian banks were in “great shape”, but he was cautious of overvaluation, especially for CBA, the largest stock on the ASX, with a market value of more than $265 billion. CBA reports its half-year results on February 12.

Commonwealth Bank is the biggest stock on the ASX. Credit: Louie Douvis

“We think CBA is a fantastic company, but we’ve just noted, if you look at the PE multiple [price-to-earning] over a long period of time, we’re trading way above where the long-term average is, and we’re seeing some overvaluation across the market, but it’s fairly pronounced in the banks.”

Commonwealth Bank, ANZ, Westpac and National Australia Bank made a combined $29.9 billion in profits in 2024, down 5.7 per cent year-on-year amid increased costs and pressure on margins. Despite these challenges, shares in all four banks have pushed higher. CBA traded above $160 last week.

Liu said the big banks would deliver flattish earnings, but she said the results and share buybacks were still looking solid.

“The housing market is slowing somewhat, but not at an alarming rate and the mortgage competition has eased off,” she said. “So with all that combined, I think the banks’ results will be pretty good, in line with expectations.”

Liu said there were concerns around Commonwealth Bank but she said an imminent valuation collapse was unlikely.

Meanwhile, Daghlian said insurance companies were likely to report improved performances,but he pinpointed healthcare as an underperforming sector, thanks to stagnant shares in biotech giant CSL.

Geopolitical uncertainty and Trump 2.0

Donald Trump’s second term in the White House has sparked considerable movement in the markets: the ASX hit a six-week high on his first day in office.

Freeman said markets would possibly be more volatile under Trump in the short term, but he said it was hard to predict.

“The sharemarket is an amalgamation of many companies, and many of those are not really heavily impacted by policy decisions,” he said. “Companies get on and run businesses every day trying to grow profits, grow markets, make their products better, and they do it regardless of the economic conditions or who’s in power.”

Liu said the only certainty to Trump’s presidency would be “a huge amount of deregulation across SME and financial markets in the US”. She also pointed to a probable loosening in the regulation of US banks, which could mean the lenders do not need to hold as much capital against their assets.

“We’ll see more money going back to the sharemarket; more money pouring into investing assets,” she said. “So I actually think that increasing activity will be quite meaningful to drive the market higher.”

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