This year the market is expecting more than 10 per cent earnings growth after the 1.7 per cent fall in the 2025 financial year returns, but the longevity of equity returns is in question.
With the market trading at a hefty price-earnings ratio of more than 19 times and market indices in the US and to a lesser degree Australia in record territory ahead of a mooted US recession, the scope for downside risk is clear.
But investors seemingly have a one-track mind, even amid extraordinary geopolitical turmoil, a wildcard in the White House and growing ownership by passive funds that simply follow the index amplifying trends.
Just how stocks can deliver when corporate earnings are down is mainly a function of timing, coming off the back of the 2022 year fall at the height of inflation fears.
The S&P 200 index is also loaded in favour of banks (23.8 per cent) and big miners (18 per cent), so with 42 per cent of the index held in a few hands, better prospects for either sector play a role in a forward-looking market.
Index (passive) buyers own about 26 per cent of the market and are essentially copycat investors and, while they work well on the upside, as shown by CBA’s price, we are now witnessing the reverse.
Consensus earnings estimates provided by Morgan Stanley show the wide-ranging sectoral expectations across the market, with bank earnings expected to slow from 6 per cent last financial year to just 0.6 per cent and big miners expected to transition from negative 16.8 per cent last year to plus 23.7 per cent this year.
This, as noted by AMP’s Shane Oliver, explains the present swap out of banks into big resources.
MST’s Hasan Tevfik also spotlights capital returns this earnings season led by the insurers, given a relatively light period in natural catastrophes.
He highlights one wildcard, with gold companies as a rare source of potential capital returns.
In a recent note he argued: “Gold companies are currently generating record cashflows at a $U3350 gold price, but their share price suggest investors are pricing in a gold price of $US2900 or less. A buyback will allow them to take advantage of the current mispricing.” He added: “The PE of the global gold sector is 11.6 times and only been lower twice before in the last 30 years.”
Potential candidates include Capricorn, Northern Star, Regis and Westgold Resources. As earnings season ramps up in the next few weeks, it is also worth noting that this is the first season in a falling interest rate cycle for a while, with rates slashed during Covid before rising from May 2022 to February this year.
Even when some worry US President Donald Trump’s tariff policies will tip the US into a recession, confidence in Australian stocks is buoyed by hopes of more demand from lower rates.
This is reflected in consensus earnings estimates looking for a 10 per cent jump in discretionary spending, more advertising, better returns for telecoms stocks and software services, to name a few.
One wildcard apart the obvious (Trump) is that a handful of companies are or have had regime changes, with new bosses at carsales.com. REA, Treasury Wine Estates, Seven’s Boral division, Domino’s and Endeavour.
Investors will be looking for any changes in strategy and in a similar vein will be anxious for updates from James Hardie boss Aaron Erter about his $14bn US Azek deal.
Until recently Macquarie chair Glenn Stevens has told anyone who would listen he would step aside when his term expires in 2027, suggesting any change in CEO might fall to the new chair. It comes down to shareholder support for Shemara Wikramanayake.
The macroeconomic themes such as interest rates and US tariffs will also be joined by questions on AI use, returns on tech spend, and it seems climate change is now an after thought.
Productivity, of course, is the word of the day.
Given the market’s elevated rating, the risks are on the downside, which puts the onus on CEO comments to show operating performance backs the market valuations.
Epic page-turner
Chatter among the competition law mafia suggests Federal Court judge Justice Jonathan Beach’s decision on the Epic vs. Apple and Google case could run into excess of 2000 pages, which must be close to a record.
It may also explain why he recently deferred decision day from late July to August 12.
The case, part of a global effort from Epic’s Tim Sweeney, also reflects a trend in Australian competition cases with the private sector taking the lead and the ACCC in the background.
To be fair, the ACCC is an active consumer law litigant and the long-awaited Google case alleging breaches for guaranteed defaults on Samsung phones to Google search is still promised for this month.
This week Employment Hero and Seek settled their competition dispute, and Consolidated Energy and Saint-Gobain went through the preliminaries.
Private litigation using the competition laws is welcome particularly in private disputes, but where there is wider market interest the ACCC should step up.
Google search, as noted previously, is fast approaching irrelevance because Google has its own search battle for survival against AI.
Bunnings’ new play
Bunnings boss Mike Schneider is leveraging the brand at every opportunity, with the latest being a trial with partner Intellihub to roll out solar panels and batteries to homeowners.
UBS analyst Shaun Cousins notes Schneider is broadening his base from the same big box in ways Dan Murphy’s couldn’t hope to match.
The Bunnings brothers started a saw mill in 1886, now Bunnings sells pet food, detergent and solar panels – all a long way from the home handymen you may have imagined were Schneider’s natural base.
US-based Home Depot has grown sales by 131 per cent over the past 15 years on a 2.4 per cent net space increase, and Bunnings is getting better growing sales by 98.9 per cent with a 26.8 per cent increase in space.
Better still, as he moves from hammers and nails to smart homes, pets, auto supplies, EV charges, plumbing and storage solutions, there isn’t much the ACCC can do because he is expanding coverage.
Two-thirds of homes are yet to install solar, and Canberra is now subsidising a battery rollout, so what better time for the Zelora brand to hit the market on a “subscription” sale model where you pay by the month with no upfront costs.
What better way to stay in touch with Bunnings.
As noted last week, Bunnings parent Wesfarmers is also a believer, having tapped the Clean Energy Finance Corporation for funds to roll out more solar panels.
The company said in a statement: “Wesfarmers has secured $100m to support an acceleration of decarbonisation activities across some of its divisions.”
“The financing package supports Wesfarmers’ investment to increase the use of renewable energy across the group, with an initial focus on Bunnings, Officeworks and WesCEF.”
Elanor’s rescue deal loses key CEO recruit amid conflict concerns
The recapitalisation plan backed by its key Singaporean investor sees it increase its stake to 48 per cent in the listed business, but the deal has raised eyebrows in the industry.
Regis Healthcare co-founder offloads more shares
The $133m trade takes the holding of The Dorman Family Trust in the business to 10.8 per cent.
Over the last three financial years, corporate Australia has delivered falling profits yet the equities market has provided three consecutive years of double-digit returns.