Rudi’s View: Mate, Where Have The Profits Gone?

Rudi's View | Nov 06 2024

In this week's Weekly Insights:

-Mate, Where Have The Profits Gone?
-All-Weather Model Portfolio

By Rudi Filapek-Vandyck, Editor

Mate, Where Have The Profits Gone?

It's not something that becomes obvious from watching the local share market retreat after climbing to a new all-time record high in September, but profits for corporate Australia are almost literally melting away post the August results season.

That results season, as reported at the time, was one of the worst over the decade past with many more 'misses' than 'beats', specifically through management teams providing more sober outlook statements than analysts and investors had positioned for.

Following a not so fantastic FY23, FY24 saw the average EPS for the ASX200 slump by -5.2%, but at least the following year would see a return to growth with consensus projecting 4% for FY25, followed up with 5.9% growth in FY26.

Two months later, and the outlook for Australian profits has dramatically changed with the consensus growth forecast sinking below 1% (at 0.8%) and continuing to trend negatively. Won't be long and Australia will be challenged to stay above zero yet again this year.

Over at Macquarie, the numbers look a lot worse with this broker projecting -4.9% for the year ahead with both the banks and large cap resources (mining and energy) expected to drag the market's average deep in the negative.

It's not so much about analysts growing more sceptical about the future; what we are experiencing is companies failing to deliver on already pared-back expectations, and so forcing those analysts to shave off yet another slice from forward projections.

The weeks past have provided plenty of examples; from BlueScope Steel ((BSL)) and Macquarie Group ((MQG)), to Metcash ((MTS)) and Woolworths ((WOW)), to smaller caps OFX Group ((OFX)), Cettire ((CTT)), Immutep ((IMU)), and numerous others.

Not all share market updates are by definition negative, as also proven by Westpac ((WBC)) on Monday morning and by Bank of Queensland ((BOQ)) earlier, but it's plain impossible to ignore the balance is heavily skewed in favour of more downgrades.

So how come the share market is still within reach of its all-time high, with the ASX200 trading on a seldom witnessed 18x multiple for next year's dwindling profits and only offering on average 3.6% in dividend yield, against a long-term average of 4.5%?

Should we worry about much lower share prices ahead, in line with rapidly weakening profits?

The Cavalry Is Coming

It's a sentiment-driven market, according to analysts at Macquarie. But I think part of the mystery, if there is one, can be located in market forecasts for FY26, currently projecting average EPS growth of 7.9%.

That number implies forward-looking investors remain confident of better times ahead, regardless of hiccups and disappointments in the short term.