Investors’ fixation on rate cuts lift aussie stocks as profits fall flat

Australian investors are shrugging off misses announced in corporate profit results and are instead concentrating on the prospect of interest rate cuts, experts say.

AMP chief market strategist Shane Oliver said. Picture: Jane Dempster

Investors are shrugging off a slight miss in corporate profit ­results amid a challenging macroeconomic environment and ongoing uncertainty over the timing of interest rate cuts expected later this year.

A slowing economy under the weight of 13 interest rate rises and stubbornly high inflation had kept expectations low. But Bloomberg data shows investors have mostly jumped to buy shares after results this reporting season.

That is even as 76 out of the top 200 companies have so far delivered a 2.12 per cent increase in earnings, in aggregate missing their profit expectations by 0.7 per cent, the data shows.

Out of the companies that have unveiled their profit numbers, 47 per cent have beaten earnings expectations, 34 per cent have missed them, and earnings from 13 companies – or 19 per cent – have been in line with forecasts.

Notably, bigger companies have been more likely to disappoint, which has dragged the overall market result to be on track for a fourth consecutive half-year profit miss, according to Bloomberg data.

“I think the market has been supported by a positive global lead, with shares in the US and the eurozone at record highs, and we have had a higher number of companies beating earnings expectations than normal,” AMP chief market strategist Shane Oliver said.

The S&P/ASX 200 index closed the week 0.17 per cent higher.

But Dr Oliver said it was too early to call the bottoming out in earnings, saying many people were feeling what economists called a “per capita” economy that was going backwards and the global picture was still “messy”.

“Consensus expectations remain for a 5 per cent or so fall in profits this financial year, with a big fall in energy sector profits on the back of lower oil, coal and gas prices and small fall in financial sector profits,” Dr Oliver said.

“Most other sectors are seeing flat to higher profits. So far many of the results for retailers have been better than feared, with investors looking through falls in profits to hope for relief ahead from lower interest rates.”

UBS equity strategist Richard Schellbach. Picture: Emma Murray

A good example of this dynamic this week is the market reaction to consumer electronics giant JB Hi-Fi, which on Monday unveiled a 20 per cent drop in net profit to $264m amid heavy discounting and higher costs. 

Despite a dividend cut of ­similar magnitude, the shares rallied 7 per cent to a record high of $60.79 after the result, as the market breathed a sigh of relief that the profit was not as bad as feared.

About 52 per cent of the companies that have reported have grown earnings on a year ago, just below the norm of 56 per cent, ­according to AMP data. While 51 per cent of companies have increased their dividends on a year ago, that is well below the norm of 59 per cent, which suggests a degree of caution by management teams.

“At a time when corporate Australia is responding to a challenging macro environment, we’re pleased to see that companies are learning to operate in the heightened interest rate and cost environment,” UBS equity strat­egist Richard Schellbach said.

“This is being reflected in the trading updates.”

Mr Schellbach said that given the challenged economic backdrop, the results so far had been impressive, with profit margins that are holding up.

“This is in part thanks to efforts from management teams to drive efficiencies via cost-cutting strategies,” he said. “However, we are cognisant of the low bar outlined by analysts in their profit expectations in the weeks leading up to the results period.”

The best-performing sectors through results had been those that were previously most fearful of high interest rates and a recession, he said.

But as long as the “soft landing thesis” remained driving investor optimism, he said he expected to see recent gains in the real estate, consumer discretionary and building materials sectors holding up.

But he added: “The economic picture is not particularly rosy, and hence the euphoria which certain equity investors have adopted over recent months could prove somewhat of a ‘twilight zone’.”

Commonwealth Bank was another company that saw its shares surge despite delivering an underwhelming 3 per cent decline in interim profit to $5bn, with thinning margins under pressure from deposit competition. 

CBA shares fell 1.7 per cent after the result but have recovered cent since to be slightly higher (0.2 per cent), despite analysts recommending investors sell the stock, and moving to downgrade their valuations for the bank.

Telstra’s half-year earnings also slightly missed analysts’ consensus estimates, and the company also lowered the top range of its full-year earnings guidance from $8.4bn to $8.3bn.

But outside the big profit misses by energy and materials companies, those in the industrial and consumer discretionary sectors have delivered better than expected results so far.

Wesfarmers on Thursday posted a 3 per cent rise in its half-year profit to $1.42bn, which was $100m ahead of analysts’ forecasts, as the Perth-headquartered conglomerate showed that its discount retailer Kmart was hitting an earnings sweet spot built on stretched households shopping for value.

In the US, about two-fifths of S&P 500 companies have now ­reported December quarter earnings, and 78 per cent of them have delivered better than expected ­results.