Rudi’s View: Earnings Optimism On The Rise

Rudi's View | 2:31 PM

By Rudi Filapek-Vandyck, Editor

The February results season will soon be in full swing. As I traditionally like to point out: every season has its specific character. This time will be no different.

But results seasons are rarely guided by earnings reports only. Events over the weekend past have reminded investors US policy decisions will be part of the mix that impacts on share prices this year.

Irrespective, most market updates released locally last week saw share prices weaken in the aftermath, including for the two companies that issued financial results, Credit Corp ((CCP)) and ResMed ((RMD)).

If we include market updates on profit guidance and quarterly performances the list of casualties grows quickly, also including Accent Group ((AX1)), Autosports Group ((ASG)), ImpediMed ((IPD)), Kogan ((KGN)), MedAdvisor ((MDR)), Origin Energy ((ORG)), Premier Investments ((PMV)), Zip Co ((ZIP)), and numerous others.

Last year's August season proved a rather underwhelming experience, generating 37% in misses --well above average-- and only 27% of beats, marking the worst milestone for corporate results in Australia post 2013, when FNArena started gathering such stats.

Should investors worry about a lack of progress made since?

Probably not. The RBA is readying Australia for rate cuts this year which no doubt will be reflected in more optimism when companies provide forward-looking guidance.

The same optimism is also creeping into investors' mindset which might lead to more companies receiving the benefit of the doubt this month, as long as there's a genuine prospect of better operational momentum later in the year.

The offset is that valuations generally are a lot higher too and many a market watcher seems worried about what might happen to share prices if expectations are not met.

Shares in Zip Co, for example, are now down more than -29% since disappointing the market, though some of that weakness is US import tariffs related.

Before we start digging deeper into likely signals and potential impacts, let's take a look first at the broader framework for the Australian share market in the opening weeks of 2025.

Earnings Growth (And The Lack Thereof)

The first observation is that underwhelming corporate earnings have not prevented the Australian share market from posting 11.17% in total return over 2024, which compares quite favourably with a much more modest general sentiment throughout the year.

A lot can be explained by the positive performance from the banks, despite little to no growth for the sector generally.

Local superfunds proved the key buyers during the first three quarters last year and international investors joined in during the closing three months.

With no disasters or major downgrades expected, and with banks and financials expected to outperform this year internationally, it seems likely shares in Australian banks will remain supported throughout 2025, despite the absence of strong earnings growth.

Outside of the banks, only about half of ASX200 companies experienced a gain in share price last year and an even smaller group outperformed the index; those performances were much closer aligned with underlying growth in earnings.

The same observation applies to the much larger group for whom sustainable share price gains proved a bridge too far; look no further than the absence of earnings growth if a proper explanation is required.

Average earnings per share growth in Australia has been negative in FY23 and FY24. FY25 (June 30) looks set for a continuation of that trend.

Those numbers are always heavily impacted by what happens in energy and commodity markets, but don't let that blind you to the fact corporate Australia does have a growth problem.

The gap between, say, Aurizon Holdings ((AZJ)), LendLease ((LLC)) and Healius ((HLS)) on one side and Pro Medicus ((PME)), WiseTech Global ((WTC)) and REA Group ((REA)) on the other side has grown to the size of the Indian Ocean in recent years.

We don't need a Master of Finance degree to explain the difference in share price performances.