Rudi’s View: February’s Reality Check

Rudi's View | 10:00 AM

February's Reality Check

By Rudi Filapek-Vandyck, Editor

No matter how one tries to cut and slice the facts, February has been a sore disappointment for Australian investors, starting with price action as the ASX200 retreated by -4.22% over the month but kept losses limited to -3.79% through bank and other dividends.

February marked a notable reversal from the optimism that saw January starting off with strong gains, pushing the index up by 4.6%, but all of those gains, and widespread optimism, have now disappeared.

Given the negative trend that dominated the final week of the month, investors might consider it a positive to see the major index unchanged for the year to date.

Excitement Arrived Too Early

February also marks the interim results season for most ASX-listed companies and here too a firm reality check has descended upon the market.

Pre-season there was widespread optimism that earnings might have bottomed and companies would be whetting investors' appetite with better cost control and rising sales, and early signs of greenshoots appearing on top.

Alas, such forecasts and anticipations have been proven to be largely premature, with businesses continuing to struggle with exposures to New Zealand across the Tasman, and Victoria on the mainland, in addition to uphill battles in places like the US and the UK.

At face value, February did generate more earnings 'beats' than 'misses', but the gap between these two outcomes notably reversed throughout the final stretch of the season as more smaller cap companies reported.

Analysts at Morgan Stanley observed when measured against sales and revenues, the balance actually swings in favour of more 'misses', which yet again indicates times remain tough out there for most companies.

Which is also the key reason as to why boards and management teams preferred to communicate with caution.

Strategists at Macquarie had anticipated much more talk about greenshoots and better times arriving, but it simply wasn't to be.

UBS research shows more companies have seen forecasts being downgraded than upgraded in February.

Results Are Better, But Not Great

The FNArena Results Season Monitor for the month doesn't simply look at reported earnings, but also takes into account broader items and forward-looking guidance, and its balance shows beats/meets/misses at roughly one third each for ASX200 companies.

While this does mark a significant improvement on last year's August season when disappointments made up the largest percentage, it was not better than February twelve months ago which was not a particularly ebulliant experience either.

Now all companies have reported for the season, consensus EPS growth has declined to -0.7% for FY25, implying negative growth on average for the third consecutive year for Australia.

The good news is EPS growth for FY26 currently stands at 8%. For a market that needs something positive to look forward to, significantly above-average growth on the horizon is exactly what the doctor would prescribe.

Sectors mostly responsible for the reduction in profit forecasts are Energy, Banks, Healthcare and Tech sectors.