Weaker profits on the cards with miners to feel the heat

Australian companies are expected to report a slew of downgrades this earnings season with an average decline in profits of 6 per cent, according to analysts.

The muted outlook for company profitability comes amid investor nervousness ahead of the release of quarterly inflation data on Wednesday, which will determine whether the Reserve Bank tightens interest rates further.

The resources sector is set to be the hardest hit sector this financial year, with earnings on average to fall by one-fifth.

If the Reserve Bank hikes interest rates again it will increase company borrowing costs and also dampen consumer spending, which would be a double whammy for groups such as retailers and construction firms.

On Wednesday, the June quarter inflation data will be released and forecasts are that it will have increased between 3.8 per cent to 4 per cent from a year earlier.

ANZ senior economist Blair Chapman expects that even if the inflation number runs higher than what the Reserve Bank is comfortable with it still will not increase the cash rate when it meets next month. The cash rate is currently at 4.35 per cent.

Deloitte Access Economics also expects the Reserve Bank to hold rates steady, even if inflation numbers are higher than expected because there is a risk of weakening economic growth.

“Any further increase in interest rates cannot be justified, and would just pull the rug out from under a cautious economic recovery,” said Stephen Smith, a partner at Deloitte Access Economics. “Should rates stay on hold, the narrative of a strengthening Australian economy through the second half of 2024 would remain intact.”

If those predictions are correct, it would be welcome news for companies. Macquarie’s strategy team has forecast that earnings for listed companies will fall on average 6 per cent for the year to June 30, 2024 but then rebound 10 per cent next financial year.

The hardest hit sector this financial year is predicted to be resource companies, where earnings are expected on average to fall by one-fifth, driven by lower commodity prices and higher costs. Bank earnings are expected to decline on average by 2.4 per cent, while the real estate sector is forecast to be flat.

However, industrial stocks, which includes healthcare stocks such as CSL, and gaming companies such as Aristocrat, are likely to outperform with earnings forecast to rise on average by 8.7 per cent.

“A key risk for investors to consider is that the Australian share market is close to its high in anticipation of Fed easing and an earnings recovery in financial year 2025,” Macquarie strategists said in a report.

“However, we are likely to see downgrades over reporting season and given investor sentiment is very positive ... we think there will be a negative skew in how the market reacts to results. This means misses could be punished more than beats rewarded.”

The US Federal Reserve wraps up its meeting overnight on Wednesday, but economists do not expect there to be a rate cut predicting that its officials will want to see more evidence of inflation cooling before acting.

Meanwhile, Morgan Stanley’s strategists and economists are also forecasting a weakness in Australian company earnings as most report their full-year results by the end of August.

Morgan Stanley’s report noted that earnings’ forecasts for June 30, 2024 are now 15 per cent lower than peak estimates and have declined significantly in the past few months.

It also said that recovery in earnings for next financial year have already been priced into the sharemarket, with the ASX200 index recently breaching 8000, and also warned that the earnings outlook for bank stocks was “anemic”.

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