Earnings optimism is back!
(This story was written and published on Monday, 3 February 2025 so share prices and moves mentioned have likely changed since).
The February results season will soon be in full swing. As I traditionally like to point out: every season has its specific character. This time will be no different.
But results seasons are rarely guided by earnings reports only. Events over the weekend past have reminded investors US policy decisions will be part of the mix that impacts on share prices this year.
Irrespective, most market updates released locally last week saw share prices weaken in the aftermath, including for the two companies that issued financial results, Credit Corp (CCP) and ResMed (RMD).
If we include market updates on profit guidance and quarterly performances the list of casualties grows quickly, also including Accent Group (AX1), Autosports Group (ASG), ImpediMed (IPD), Kogan (KGN), MedAdvisor (MDR), Origin Energy (ORG), Premier Investments (PMV), Zip Co (ZIP), and numerous others.
Last year’s August season proved a rather underwhelming experience, generating 37% in misses --well above average-- and only 27% of beats, marking the worst milestone for corporate results in Australia post 2013, when FNArena started gathering such stats.
Should investors worry about a lack of progress made since?
Probably not. The RBA is readying Australia for rate cuts this year which no doubt will be reflected in more optimism when companies provide forward-looking guidance.
The same optimism is also creeping into investors’ mindset which might lead to more companies receiving the benefit of the doubt this month, as long as there’s a genuine prospect of better operational momentum later in the year.
The offset is that valuations generally are a lot higher too and many a market watcher seems worried about what might happen to share prices if expectations are not met.
Shares in Zip Co, for example, are now down more than -29% since disappointing the market, though some of that weakness is US import tariffs related.
Before we start digging deeper into likely signals and potential impacts, let’s take a look first at the broader framework for the Australian share market in the opening weeks of 2025.
Earnings Growth (And The Lack Thereof)
The first observation is that underwhelming corporate earnings have not prevented the Australian share market from posting 11.17% in total return over 2024, which compares quite favourably with a much more modest general sentiment throughout the year.
A lot can be explained by the positive performance from the banks, despite little to no growth for the sector generally.
Local superfunds proved the key buyers during the first three quarters last year and international investors joined in during the closing three months.
With no disasters or major downgrades expected, and with banks and financials expected to outperform this year internationally, it seems likely shares in Australian banks will remain supported throughout 2025, despite the absence of strong earnings growth.
Outside of the banks, only about half of ASX200 companies experienced a gain in share price last year and an even smaller group outperformed the index; those performances were much closer aligned with underlying growth in earnings.
The same observation applies to the much larger group for whom sustainable share price gains proved a bridge too far; look no further than the absence of earnings growth if a proper explanation is required.
Average earnings per share growth in Australia has been negative in FY23 and FY24. FY25 (June 30) looks set for a continuation of that trend.
Those numbers are always heavily impacted by what happens in energy and commodity markets, but don’t let that blind you to the fact corporate Australia does have a growth problem.
The gap between, say, Aurizon Holdings (AZJ), LendLease (LLC) and Healius (HLS) on one side and Pro Medicus (PME), WiseTech Global (WTC) and REA Group (REA) on the other side has grown to the size of the Indian Ocean in recent years.
We don’t need a Master of Finance degree to explain the difference in share price performances.
Close That Gap!
Many in today’s market are counting on a narrowing of the gap between Winners and Laggards, which –all else remaining equal– should allow those Laggards to put in a better share price performance.
The current quarterly reporting season in the US is providing plenty of signals this might indeed be happening in North America.
Analysts at RBC Capital reported the following this week:
The shift we’ve seen in leadership this year, with Value beating Growth and Small Cap stabilizing relative to Large Cap also seems justified from an EPS perspective, even without last week’s DeepSeek episode.
Our favorite gauge of EPS sentiment –the rate of sell-side revisions to the upside– has shifted in favor of Small Cap over Large Cap (this means Small Cap has been seeing more upward revisions to EPS forecasts for this year and next).
This stat is technically still stronger for Growth and the top 10 market cap stocks in the S&P500 compared to Value and the rest of the S&P500, but the gaps have started to narrow suggesting Mega Cap Growth’s dominance on near-term EPS dynamics has softened.
In Australia, where the RBA has yet to deliver its first rate cut and with uncertainties looming from state and federal elections, we are unlikely to witness those same dynamics play out this month already, but we might spot some early green shoots.
Such optimism has underpinned a positive share market performance in January (up 4.57%) with various forecasters suggesting earnings in Australia are near a bottom or they might already be on the way up.
Assuming this early optimism proves justified, the big difference with August last year when most misses were caused by underwhelming forward guidance, is this time boards and management teams might prove more optimistic.
Earnings Forecasts And Broker Ratings
Despite many downgrades happening on the back of corporate updates in January, it appears consensus forecasts are trending upwards, albeit cautiously, which is a signal that general optimism is rising.
As we are still in the early phase of earnings growth recovery, and with momentum inside the domestic economy uneven, there will still be plenty of room for nasty disappointments.
Consider, for example, Autosports Group issued a profit warning in November last year and did it again in January.
Another worry is a share market trading near its all-time high leaves little room for disappointment for the Winners in today’s market.
Even if we adjust for the local PE ratio to have risen to 16x over the past ten years, the current market multiple remains double digit above that average (closer to 19x before Monday’s sell-off).
My humble suggestion is having some cash on the sideline might prove very apposite throughout February as the market’s short-term knee-jerk response might create opportunities for those with a longer-term horizon.
A recent preview by stockbroker Morgans suggests average EPS growth for calendar year 2025 is poised to rise to 5% from -2% in 2024.
The bulk of this improvement might not show up until the second half, but markets are forward-looking (in the absence of short-term disruptions).
All of the above is reflected in stockbrokers’ Buy, Hold and Sell ratings for ASX-listed stocks.
For the eight stockbrokerages monitored daily, the percentage of Buy and equivalent ratings has now risen to above 60% which is a rather rare occurrence.
The percentage of Buy ratings has been exceptionally high post covid, which reflects the uneven and narrow-based recovery for the Australian share market since.
It’s all well and good to proclaim shares in small caps and cyclicals are undervalued, without a notable recovery in earnings those share prices can remain “cheap” for a very long time.
In line with that extremely high percentage of Buys, the share of Hold/Neutral ratings has fallen below 33%, which hardly leaves anything left for Sell ratings (7.50%).
Early Signals
As suggested at the start of today’s Weekly Insights, let’s investigate whether there are lessons to be drawn from January’s market updates.
Credit Corp’s result missed consensus forecasts and thus the share price received instant punishment while forecasts were adjusted downwards.
At face value, the company is positioned for strong growth this year, but this follows two years of declining profits.
The finer details show FY25 might still not match the result achieved in FY22. Competition for buying bad debt ledgers in the US remains key.
Zip Co’s market update also disappointed because of the US business, though in this case analysts believe the share price shellacking is overdone. Citi has upgraded to Buy.
More troubles in the US, however, has also triggered a warning from Citi analysts about the risks for online fashion platform operator Cettire (CTT) whose revenues are heavily skewed towards US consumers.
Virtual pharmacist company MedAdvisors’ (MDR) disappointment also concerns slower US market momentum.
Import tariffs on Mexican goods has prompted Fisher & Paykel Healthcare (FPH) to specify 60% of US sales are sourced from the neighbouring country.
This is likely to see analysts reduce forecasts in the days coming.
Do we have a theme here?
ResMed’s Q2 performance was better-than-expected though some might fret about a gross margin that failed to lift.
ResMed’s share price rallied strongly into the release, then failed to extend that rally as the degree of positive surprise simply wasn’t large enough to warrant even more excitement.
The average target price from the brokers monitored daily by FNArena has risen to $43.05 from $41.08 and that’s the clearest indication that analysts, overall, liked the result and have been increasing their projections in response.
The ResMed experience also shows a great result does not by default always translate into a positive share price response.
Longer-term, that response immediately after the result counts for nothing. It’s good to remember that too.
Plenty of insights from Consumer-related companies, including Myer (MYR), Kogan, Accent Group, Premier Investments, etc.
Autosports Group’s tough conditions can equally be traced back to household budgets under duress in Australia.
The discussion among analysts is still the same: are Australian consumers ready to increase their spending on the back of more election promises and RBA rate cuts?
Needless to say, there’s skepsis galore.
Today’s debate also features Christmas purchasing and who was left out in the cold? All shall be revealed in the weeks coming.
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