Earnings season reality check for dream of economic soft landing

The Australian sharemarket hangs in the balance this week as a wave of major earnings reports could either solidify hopes of a soft landing or trigger turbulence.

As Commonwealth Bank and Wesfarmers step onto the earnings stage this week, their results will offer a crucial test of the economic soft-landing narrative propelling stock prices higher.

Global markets continued rallying last week, with the S&P 500 in the US gaining 1.4 per cent to surpass the 5000 mark for the first time amid strong earnings ­results.

Tech giants like Alphabet, Amazon, and Apple fuelled the surge, pushing the Nasdaq briefly over 16,000 to a new record high.

AI-related stocks like Palantir and Cloudflare also rose, further boosting the tech sector’s ­dominance.

Eurozone and Japanese shares ended the week 0.8 per cent and 2 per cent higher respectively, while Chinese stocks gained 5.8 per cent, fuelled by news of more stimulus measures.

Australian shares were higher on Friday, but the ASX 200 index closed the week 0.7 per cent lower following two weeks of advances. The retreat was led by resources companies and RBA commentary that was more hawkish than expected.

Despite leaving the cash rate on hold at 4.35 per cent last Tuesday, Michelle Bullock’s first meeting as RBA governor dis­appointed some in the market who were hoping for more dovish comments to support expectations of interest rate cuts.

At the post-meeting press conference, Ms Bullock said the board would keep all future policy options open, including cutting, holding or raising interest rates.

“A further increase in interest rates cannot be ruled out,” she said. That was because even if inflation had fallen – and the central bank expects it to be 2.6 per cent by mid-2026 – there were lagging risks that it could remain elevated longer than expected, she said.

Bond yields, which move in the opposite direction to bond prices, pushed higher as the central bank fought back against imminent rate cuts.

“We remain of the view that shares have run a bit ahead of themselves and are now overbought and at risk of a short-term correction,” said AMP head of investment strategy Shane Oliver.

“Risks around central banks and the timing of rate cuts, recession risks and various geopolitical issues, including the escalating Middle East conflict, (are) all providing potential ­triggers.”

However, any pullback was likely to be temporary and in the context of an ongoing bull market, he said.

Investors will be busy tracking the 50-odd big companies unveiling their December-half earnings this week.

That starts on Monday with earnings from electronics retailer JB HiFi, followed by media conglomerate Seven West on Tuesday, CBA and wealth manager AMP on Wednesday, and Wesfarmers on Thursday.

“Key to watch will be guidance around how the consumer is holding up,” said Dr Oliver.

Earnings in energy companies are expected to fall sharply but profits in the utilities, healthcare and industrial sectors are expected to remain strong.

Overall, the expectation is for a 5.4 per cent fall in earnings in the 2023-24 financial year.