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Stocks, sectors to watch as Australia underwhelms in reporting season
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- Australian companies underperform, but US strength creates positive outlook
- Treasury Wine Estates (ASX:TWE) delivers 82% earnings surprise
- Gold price at record high, potential for more if the US cuts rates
Special Report: As the second-quarter earnings season draws to a close, moomoo is seeing the impact of global economic uncertainty in declining profitability across many sectors.
While a higher-than-average percentage of companies are exceeding forecasted earnings, the size of those positive surprises is below typical levels.
But not all the news is bleak and we anticipate market growth next year, explains moomoo Australia market strategist Jessica Amir.
Australia underperforms, but US strength creates positive outlook
The recent US earnings season set a high bar, with many S&P 500 companies far exceeding expectations. This is a hopeful sign globally, even as the Australian market faces its own challenges.
“The US reporting season set the benchmark as high as a gold medallist in the Olympic high jump,” says Amir.
“Ninety-three per cent of S&P 500 companies have reported results so far, and most of them have delivered better-than-expected sales and profit growth, with an impressive 8.5% profit growth.
“Naturally, earnings growth drives share price growth, so that’s a win – and supports the market.”
The S&P 500’s strong showing has set a benchmark that other markets, including the ASX, will be hard-pressed to match.
“Australian company results are starting to underwhelm and are walking a tightrope,” Amir notes.
“So far, about 45% of S&P/ASX 200 companies have reported, and unfortunately, most are delivering slightly weaker-than-expected earnings results or profits.
“We’ve seen an earnings decline of about 2.4%, reflecting higher-than-expected inflation and wages eroding profits.”
The decline in profitability reflects broader economic challenges, including sluggish consumer demand, higher interest rates, and persistent inflationary pressures.
Many companies need help maintaining margins as cost pressures mount, leading to softer earnings than initially anticipated.
Sectors particularly exposed to these headwinds, such as retail and consumer discretionary, have been among the hardest hit.
However, Amir emphasises the outlook isn’t all negative.
“The good news is the market is forward-looking – it sees inflation coming down and Fed rate cuts supporting future global economic growth and company profits. The market anticipates forward earnings growth of 6% next year for the S&P/ASX 200, so the outlook looks stormy, but the clouds are parting with blue skies ahead.”
What to watch: winners and losers in a shifting market
“If we look at the results so far, six of the 11 sectors have delivered weaker-than-expected results,” Amir explains. “The biggest drags are energy, communications, and industrials, with average profits declining 24%, 18%, and 14% respectively.
“Nimble investors are paying attention to what’s happening at a macro level and are focusing on the future. China, the biggest consumer of oil and steel, is now moving to clean energy production – wind, solar, and selling the most electric vehicles in the world.
“They’re reducing dependence on oil, and China’s new economic focus is tech for the future. This weakens the course for steel production and iron ore demand, while the focus shifts to copper, aluminium, and nickel.”
This trend is expected to continue, with future-facing metals such as aluminium, copper, and nickel likely to benefit from China’s green energy push.
On the other hand, the staples sector has been a standout performer, defying the broader trend of declining profitability.
“In times of slowing economic growth, we usually see the ‘bread and butter’ sectors holding up, and that’s what we’re seeing,” Amir notes.
“Consumer staples are delivering the most pleasant earnings surprises, with the average staples business reporting 26% more profits than expected.”
She also highlights Treasury Wine Estates (ASX:TWE) as an unexpected success story.
“I wouldn’t call Treasury Wine a bread-and-butter essential, but wine is a need to some people. It delivered a punch – 82% better earnings than expected. It’s raised prices on top-tier Penfolds products and is seeing greater sales from a new premium label in the US. Additionally, shipping to China resumed after sanctions were dropped for the first time in four years.
“TWE is a company to keep on your radar as global wine production is expected to drop due to 60-year lows.”
Safe havens: where to find stability and growth amid uncertainty
In uncertain times, specific sectors provide a measure of stability for investors. Over the past year, defensive sectors such as healthcare, consumer staples and utilities have performed well during market pullbacks.
“And, of course, gold – the mother of safe havens – is trading at record all-time highs of US$2515,” notes Amir.
“But if the Fed cuts and history repeats itself, gold could rally to US$3500 or even US$4000. Of course, history never repeats itself, but it does rhyme.”
This article was developed in collaboration with moomoo Australia, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
