Though the economy held up better than economists expected, the lacklustre reporting season showed better than anticipated revenues but primarily displayed that corporates haven’t done enough to control costs, which is worrisome at a time when inflation is rising.
The reporting shows that the environment is fragile at the moment, a matter not helped by worries over the outlook for China’s economy or U.S. interest rates.
On Friday, the U.S. market may have rebounded as Fed chair Powell gave a fairly balanced speech, but China’s sharemarket surged momentarily as regulators declared more disconnected stimulus measures.
Overall, August has been challenged, with the S&P/ASX 200 being down 3.4% for the month to date, which shows this is the worst month since September.
At this stage and according to the Australian Business Review, “the reporting season hasn’t been good enough in terms of the outlook to protect the market from its usual September sell-off, which has averaged 2.3% over the past decade.”
Based on how the year has done, analysts have begun to lower their expectations for the current financial year by cutting projected financial 2024 profits by a ratio of 50%.
According to MST’s Hasan Tevfik, it will most likely be a 5.7% fall, down from minus 0.8% a month ago and, additionally, 0.7% six months ago.
UBS equity strategist Richard Schellbach says that the cost to do business is also increasing, which is also affecting corporate results.
“Across sectors, management teams are pointing to the cost growth they are seeing from labour, rent, energy, transport and technology spend,” he said. “The broad stickiness in cost inflation that we saw in company results maps with recent business survey data and suggests that input costs pressures will likely remain elevated.”
Currently, the cost is being absorbed by customers, but we wonder how long this can continue before shareholders are affected.
“This outcome again illustrates how ultra-tight labour markets have diluted the impact of the interest rate hikes we have seen over the last 12 months,” Schellbach said.
The current corporate market is not sustainable if demand decreases and costs stay higher than usual, making corporate layoffs progressively likely.
“We expect that investors will remain frustrated and somewhat confused at how this economic cycle has failed to play out at the speed they had expected,” Schellbach said.
“Being defensively positioned has proved painful over the past 12 months, as many cyclical sectors have bounced off their mid-2022 lows. At the same time, investors seem unwilling to buy in at current levels given fears that the economic slowdown could eventually translate into weaker profits and lower share prices.”
According to Morgan Stanley equity strategist Chris Nicol, consumer-facing companies have had a “hall pass” up until now, but with the sharemarket falling this month, Nicol shared, “some perspective has sunk in”.
“We continue to see limited potential for sustained rerating of multiple, and based on result season evidence expect aggregate earnings to remain under pressure,” Nicol said.
