Earnings season coming up

Earnings season is just around the corner and analysts are expecting another strong one.

While the S&P 500 hit record highs for the last six days, Australia’s S&P/ASX 200 lost momentum after hitting a record 7406.2 points last month, and was little changed from four weeks ago. Picture: NCA NewsWire / David Swift

Earnings season is just around the corner and analysts are expecting another strong one.

After surging 24 per cent (or 27.8 per cent with dividends) in 2020-21, Australia’s sharemarket was awaiting US non-farm payrolls data and the outcome of an extended OPEC meeting on Friday.

While the S&P 500 hit record highs for the last six days, Australia’s S&P/ASX 200 lost momentum after hitting a record 7406.2 points last month, and was little changed from four weeks ago.

But while most Australian companies have entered a blackout period before their results in August, July is normally the strongest month of the year with a 10-year average gain of 2.5 per cent, as funds tend to deploy cash at the start of the financial year.

Apart from the US market, where the leads are increasingly bullish, investors await guidance on monetary policy from the Reserve Bank after next Tuesday’s board meeting.

Recent Covid-19 outbreaks should reinforce dovish undertones even if the RBA gives itself flexibility to dial back its bond buying next year and possibly tighten rates before “2024 at the earliest”.

The price-to-earnings ratio of the S&P/ASX 200 has fallen from a record high of near 21 times in November to about 18 times, and it may slip further if bond yields rise amid signs of inflation and speculation of Fed tapering, but the earnings upgrade cycle should continue before the August reporting season, with strength coming from resources, banks and media, according to Macquarie.

“We still see earnings growth as the key positive driver for positive stock returns, given the risk that Fed tapering and higher real yields would be a valuation headwind,” said Macquarie’s Australian equity strategist, Matt Brooks.

His expectation for aggregate growth in ASX 200 company earnings per share for 2020-21 has risen from 15 per cent since the forecast after the February reporting season to an impressive 28 per cent now, due to significant upgrades for resources stocks – thanks to surging commodity prices, especially iron ore – plus upgrades to banks, amid lower impaired loan provisions.

He sees 2021-22 EPS growth of 12 per cent – 5 points more than February – driven by resources.

“We still see earnings growth as the key positive driver for positive stock returns, given the risk that Fed tapering and higher real yields would be a valuation headwind,” Brooks says.

He notes that the February 2021 reporting season featured the biggest upgrade of earnings-per-share expectations by analysts in two decades.

He sees that as part of a longer trend of positive revisions that started in September 2020.

“While cyclical momentum has peaked, given the strength of the upgrade cycle, we expect the positive revisions to continue into August results.”

Depending on how fast the cycle slows, he feels that we are more likely to see corporate earnings disappoint in the February 2022 interim results season than the looming August full-year reports.

Macquarie’s “counter-consensus buys” into results season include Seek, Boral, OZ Minerals, Eagers, News Corp, Healius, Sims, Deterra and Viva Energy.