With the ASX nudging all-time highs and expectations of further rate hikes and growing economic uncertainty, company earnings will play a critical role in determining market direction.
To date, earnings estimates for the February first half (1H) reporting season remain reasonably upbeat. The concern is that they could fall in 2H23 when headwinds from rising interest rates hit home. Quality of earnings, revenue growth, margins, and so on will be analysts’ focus as the macroeconomic background takes a back seat to company fundamentals.
Source: Macquarie, AFR
Consensus estimates point to S&P/ASX200 earnings growing 7.3% in FY23 from 4.6% just 3 months ago. The long run average growth in earnings for the ASX200 is around 5.5%. Key themes to watch in the FY23 earnings reporting season include changing trends in consumer demand and consumer confidence levels, the impact of currency, positioning in resources, cost inflation, shortages in labour and supply line issues, and balance sheet strength. Company outlook statements and dividend payout ratios are sure to be closely scrutinised.
The resource sector has responded strongly to the China re-opening theme, and earnings per share growth will be required to justify higher share prices; mining stocks have generally outperformed their commodity price drivers. Discretionary retail earnings are vulnerable to rising rates, with 10% of Australian households potentially affected by the looming “fixed rate mortgage cliff” i.e. rolling off fixed loan rates into higher variable rate repayments. Healthcare stocks could be an area of disappointment due to the effects of the pandemic (e.g. lower rates of covid testing, and skilled labour shortages).
The broad valuation de-rating in 2022 will give some comfort that valuation metrics are not too far from long term averages. While the index has surged some 16% since October, forward price to earnings levels now sit around 14.8x, not far above the long term average of 14.5x.
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