Earnings pain on the menu as rate rises bite
Weaker profit growth and cautious commentary from corporate bosses look likely to dominate the upcoming annual results season, with consumer-facing businesses most likely to bear the brunt of a slowing economy.
As higher interest rates weigh on economic growth, investors say the market’s focus during the deluge of annual profit results in August will be on how weaker household spending is affecting sales, and whether rising labor and energy costs are putting a squeeze on margins.
Earnings season is expected to show profit growth slowed in 2022-23, with more pain ahead in 2023-24.Credit: Louie Douvis
Chief executives’ outlook statements are expected to be cautious, and there are warnings of more earnings downgrades. But with some pockets of the economy still in good shape and unemployment near historic lows, experts are predicting a slowdown rather than a cliff.
Earning updates will start flowing this week, with Rio Tinto to deliver its half-year results on Wednesday, while Macquarie Group will update investors on its latest quarter at its annual meeting on Thursday.
AMP chief economist Shane Oliver said consensus estimates were that aggregate earnings growth across the ASX 200 had slowed to about 2 per cent for the 2022-23 financial year, down from 22.5 per cent in 2021-22.
Oliver stressed that conditions were mixed, but the economic weakness would have a bigger impact on 2023-24, when total profits are tipped to fall.
“It’s probably going to show a further deceleration in earnings growth,” he said. “I wouldn’t say it’s gloomy, but it will definitely show a slowdown.”
With the economy weakening, the market is likely to pore over company results for insights on the strain on households from higher interest rates, and the hit to profits from rising costs.
Retailers including Harvey Norman, Universal Store and Best and Less have issued downgrades in recent months, while bank bosses this month also highlighted the potential for customer stress, albeit from a low base.
The Commonwealth Bank’s result on August 9 will provide a key gauge of how households and banks are faring, but earlier this month CBA chief executive Matt Comyn said outright hardship remained low, despite rising pressures.
Andrew Martin, principal at fund manager Alphinity, said banks still appeared to be experiencing low rates of loan stress, and retailers would feel the pain of a slowdown first.
“I think the commentary [from banks] will be very similar to what we saw in May,” Martin said, referring to the latest bank reporting season.
“If you look at where the profit warnings have come, it’s retail.”
For mining giants, much of the focus will be on the outlook for China’s economy, which has been slowing in recent months, sparking predictions of government stimulus.
Another key issue for investors will be profit margins, and how much firms have been able to flex their “pricing power” by passing on higher costs to customers.
Milford Asset Management portfolio manager Will Curtayne predicted there would be more “negative surprises” in the earnings season, with consumer-facing businesses being squeezed on two fronts: weaker spending and pressure on margins.
“We think the August reporting season will likely represent the peak of the earnings downgrade momentum this cycle,” he said.
White Funds Management managing director Angus Gluskie also said the extent of consumer weakness would be a key theme, alongside rising business costs and arrears rates for banks.
“Are we going to see impacts of the consumer purchasing less, or businesses cutting back on services to try to lower their own costs? I think we are going to see it, but it’s how deeply are we going to see it,” he said.
The latest earnings season comes as investors continue to grapple with the impacts of a global inflation breakout, which has caused central banks to raise interest rates steeply, risking recession.
Figures on June-quarter inflation, to be published on Wednesday, could be a key influence on whether the Reserve Bank pushes the cash rate higher than 4.1 per cent, compared with 0.1 per cent in April last year.
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