Heading into this reporting season, we are concerned to see that the market is forecasting significant earnings per share (EPS) downgrades, despite continuing strong economic data for Australia.
Resources dominate negative revisions
While the company reporting season officially falls in the month August, of the ~30 companies that have announced quarterlies or trading updates in July so far, there has been a substantial negative EPS revision skew.
What is most surprising to us, given concerns about interest rate impacts on consumers, is that the negative revisions have been mostly concentrated in the Resources space.
Source: Martin Currie Australia, FactSet; as of 31 July 2023. Data for the S&P/ASX 200 Index. NTM: next twelve months
Share prices disconnect from earnings fundamentals
Rather than the Resource company results themselves (as the start of the deteriorating revisions pre-date the latest round of quarterlies), the weak outlook for China property policy appears to be a key force for the downgrades. The impact of lower forward commodity price expectations is feeding into weaker EPS expectations.
However, there are several conflicting forces impacting the outlook for Resource stocks in each direction. These include:
- very poor growth data for Chinese property;
- impending steel production tightening in the second half;
- strong steel production being driven by exports;
- a perceived large number of short positions in commodity stocks; and
- hopes that stimulus is about to arrive.
Conflicting drivers have created a real disconnect between EPS revisions and company share prices. Earnings outlooks appear to be driven by the fundamentals, whereas stock prices are being driven mainly by the China stimulus hope.
This is illustrated well by the recent divergence in BHP Group’s consensus EPS and share price in the chart below.
Source: Martin Currie Australia, FactSet; as of 31 July 2023. NTM: next twelve months
Weaker domestic economic expectations to dominate non-resource outlook
The miners have dominated the discussion in the lead-in to reporting season proper. However, Resource quarterlies have not generally been a reliable predictor of overall reporting season outcomes. We track overall outcomes in terms of ‘Surprise’, ‘Revisions’, and ‘Price Reaction’ for the S&P/ASX 200.
In contrast to the Resource downgrades, we are seeing lead-in EPS revisions for the Industrials, Financial and Real Asset sectors being broadly flat. This, and the general lack of profit warnings, suggests that the reporting season could be more balanced overall.
However, our February reporting season theme was “looking over the edge”, and the Australian market continues to stand on a mortgage rate cliff and a potential recession. The August results will likely be dominated by cautious views on the consumer, costs and future EPS guidance, rather than any significant jubilation for the robust earnings delivered in the last six months.
The August results will likely be dominated by cautious views on the consumer, costs and future EPS guidance, rather than any significant jubilation for the robust earnings delivered in the last six months.