Solid start to results season but market outlook darkens

Reporting season is off to a good start but with shares rebounding strongly in recent months and a downturn looming the question is whether the bounce will keep its momentum.

Reporting season is off to a good start but with shares rebounding strongly in recent months and a downturn looming the question is whether reports will be good enough to keep the bounce going.

About a fifth of the top 200 companies had reported by Monday, with about 140 still to go.

By the end of this week, the reporting period will be about half way through.

Analysts will then be better placed to cast judgment on the trajectory for earnings and dividends relative to the bullish expectations implied by the current level of the sharemarket.

After rising almost 10 per cent from what was at the time an 18-month low of 6433.37 points in mid-June, Australia’s market was on the verge of ending a “correction” from its record high.

It comes amid an even stronger rebound in the US amid hopes the Federal Reserve has undergone a “dovish pivot”. FOMC minutes on Thursday aren’t expected to confirm that’s the case.

As of last Friday, the number of reporting companies that exceeded Macquarie Equities’ estimates for earnings by at least 5 per cent outnumbered those that missed earnings estimates by that much by 20 per cent, with large caps and financials having relatively more positive earnings surprises.

“While it’s early in reporting season, it is still positive to see net beats exceed misses,” says Macquarie’s Australian equities strategist Matthew Brooks.

“While a small sample so far, large companies and financials have relatively more positive earnings surprises and free cash flow has generally been better than expected, but we are yet to see consumer discretionary or industrial results where inventories could be an issue.”

Results from retailers began to trickle through on Monday with JB Hi-Fi down 1 per cent after its results.

The electronic goods retailer’s results were previously reported so its outlook was key.

With consumers having been supported by unprecedented fiscal and monetary policy stimulus during the pandemic and yet to see the full impact of recent rate hikes, JB Hi-Fi’s fiscal 2023 started with “continued sales momentum and strong sales growth rates over a three-year period”.

Citi’s Sam Adrian Lemme says that with the consensus projecting falls in JB Hi-Fi’s sales and earnings of 4 per cent and 25 per cent respectively for fiscal 2023, analysts were “already factoring in about 75 per cent of a potential earnings decline from a severe consumer recession”.

“In our view, most of the downside risks are already priced in while the upside risks to spending are being overlooked,” Lemme says.

But after bouncing almost 28 per cent in the past two months, JB Hi-Fi shares took a breather.

Still, GPT Group and Caresales.com rose more than 5 per cent on solid earnings reports with Carsales hitting a seven-month high after positive guidance for growth and margins.

As for aggregate earnings guidance so far, Brooks says that as of last week about 80 per cent of companies had provided some guidance, with 45 per cent giving an earnings number.

But unfortunately, 20 per cent of those – mostly property trusts struggling to cope with rising interest costs – say earnings may fall in nominal terms.

Another 15 per cent guided to growth rates less than the expected rate of inflation.

“It’s interesting to note one-third of stocks guided to growth of less than 6 per cent – including declines – which is less than the 6 per cent inflation forecast for fiscal 2023,” Brooks says.

“Most are real estate investment trusts impacted by high interest costs, and hopefully guidance is conservative given the challenging environment.”

He says the local bourse is “unlikely” to be in a new bull market, although in a purely technical sense it never ended the post-Covid bull market and was merely in a correction.

On valuation, he notes the All-Industrials PE ratio has risen to 18.6 times, higher than 99 per cent of valuations before the pandemic started.

“That rises to 24 times if we cut earnings for a US recession, which we still expect in 2023,” he says.

“Equities have risen in response to slowing inflation, which reduces peak policy rates, but even if there were no more hikes, what global banks have already done may be enough to cause a US recession.”

An inverted yield curve and a peak in the Conference Board leading indicator “signal a recession in 2023”, and the Fed and RBA are “not done hiking yet as inflation is still high and labour markets have not cracked and more hikes adds to growth headwinds”.

“Net Fed liquidity seems to have supported the rally since June, but we think a step-up in Fed quantitative tightening in September will drive volatility.”

Brooks also notes that August is the third straight month of “mid-range net EPS downgrades” of around 20 per cent “but still not what you see at a market low”.

The consensus estimate for FY23 earnings per share growth has fallen to 15 per cent, but is “still too high given risk of a US recession where a 10 per cent fall is more likely.”

“It is hard to make a bull case for stocks when PEs are in the 99th percentile, earnings are falling, and central banks are tightening.”