Rudi’s View: What Can August Deliver?

Rudi's View | 10:00 AM

In this week's Weekly Insights:

-What Can August Deliver?
-Morgan Stanley's August Season Hot Picks
-FNArena's Corporate Results Monitor
-All-Weather Portfolio FY24 Review
-Video: Why FNArena & All-Weather Stocks

By Rudi Filapek-Vandyck, Editor

What Can August Deliver?

As August beckons, and analysts and investors are preparing for what promises to be a 'lively' reporting season, the market seems to pay no attention to the fact disinflation has become a rather stunted process in Australia, unlike other countries, and yet another CPI release that reveals more of the same might well trigger another RBA rate hike in August.

Goes without saying, a share market that refuses to lay down, other than the occasional hiccup, doesn't seem to be priced for another negative surprise from the RBA, though such an unwelcome development is not guaranteed, of course.

We shall all find out more on July 31, when the local CPI numbers become public knowledge.

Analysts at Morgan Stanley think the RBA rate hike risk is larger than current price action is suggesting. They reminded investors on Monday the CPI in Australia has now accumulated for five consecutive months without declining. If this week's CPI print doesn't show weakness, and Morgan Stanley's forecast is essentially for little movement since the prior update, that'll make it six months of no noticeable decline.

Can the RBA stomach six months of stasis amidst a public debate about the economic stimulus coming from tax cuts and energy bill subsidies? The Trimmed Mean is expected to rise by 1% QoQ, which would see the annual rate of Trimmed Mean inflation remain at 4.0% YoY, above the RBA's own forecast of 3.8% for June.

Maybe Morgan Stanley's concern is unfounded and local market participants have adopted the view that even if the RBA decides to tighten, compensation is already in the pipeline through less tax and lower energy bills?

A share market that refuses to weaken meaningfully remains, of course, priced above historical averages. This need not be a major problem, not when there's no economic recession on the immediate horizon, but when valuations are high, the bar is automatically lifted for corporate results, and companies better deliver, or else.

The safest prediction to make is that overall volatility will rise, and probably by a lot in the weeks ahead. This week's CPI and the RBA meeting in August are each potential triggers, but there'll be plenty to digest and to absorb throughout August.

Trends might seem straightforward when markets follow macro-economic indicators or broad top-down narratives, but when companies report their financials theoreticals and reality meet, and that can be vindicating and re-affirming as much as it can wipe out everything that has happened up until that point.

Corporate results matter. They provide confidence that everything is okay, or that the future will be okay. That confidence will be put to the test in August. And as history shows, the outperformers are not by default destined for failure and disappointment, no matter how hard some investors would like this to be the case, just like laggards might prove to be mis-priced, but not necessarily by default, and certrainly not all of them.

Corporate Results In The USA

Results season is also when first impressions can be quite deceiving, as we've all witnessed in the US last week with share prices in Tesla, Alphabet (Google) and UPS (among others) weakening upon quarterly market updates, pulling indices down, but does this mean corporate profits are not living up to expectations in the world's most important market?

A cursory glance over the underlying statistics suggests US corporate profits are still doing fine. Some 79% of all reporters in the S&P500 is still managing to beat consensus on EPS, though only 58% is able to do so on sales.

The latter clearly indicates the US economy is slowing, but also that businesses are struggling with falling inflation, but higher costs and more reluctance in spending, which is also corroborated through transcripts of post-result conference calls between CEOs and professional investors.

Only 50% of US companies is currently able to beat consensus on both sales and EPS.

Analysts at RBC Capital observe how little changes are being made to analysts' EPS forecasts, with consensus numbers essentially holding steady for this year and next around US$244 per share on average for the S&P500 in 2024, and US$278.50 for next year.

On numbers from S&P Global Market Intelligence, the current Q2 reporting in the US is actually increasing analysts' forecasts for EPS growth with Q2 growth currently averaging 9.27% compared with expectations of 8.29% EPS growth pre-season (one month ago).

The biggest gainers, as far as market forecasts are concerned, are US Financials whose EPS growth has been revised up to 14.38% from 3.74%. But even IT is still experiencing net upward revisions with sector EPS growth now at 16.93% from 15.97%. The worst hit sector is Energy, where EPS growth has weakened to minus -1.76% from a positive 11.90%.

So far there has been no big deflation in growth forecasts for large cap winners, Gen.Ai or otherwise, and that creates one big question mark for those predictions about a new, multi-year era featuring a shift in market leadership in favour of small caps, cyclicals and 'value' in general.