Not everyone shares Sherwood’s outlook, however, with other professional investors tipping earnings to push the market into a sustained rally as stocks beat the expectations implied by their low valuations.
“There’s been a lot of hot money on macro factors but a lot of these companies don’t really change too much,” says Atlas Funds Management chief investment officer Hugh Dive. “I’m looking forward to February, more so than previous years. Given valuations are down, a rally could last several months.”
Clime Asset Management senior analyst David Walker expects some strong results from large-cap companies including Woodside Petroleum and Woolworths.
On Thursday,Woodside reported a strong December quarter from its LNG plantswhich pushed its sales 43 per cent higher in the fourth quarter. “The solid production in the fourth quarter means Woodside’s second-half result should be quite strong,” Walker says.
“I think we’ll find Woolworths had a strong December quarter. Coles had the upper hand in September but Woolworths’ excellent strategy, should see them do well.”
Walker also tips Commonwealth Bank will have a strong result when it reports its half-year results on February 6.
Perpetual’s Sherwood expects retail and mining stocks to be among the most disappointing as they are already under pressure due to wider economic concerns.
“Despite expectations being low, companies with exposure to Australian consumers will disappoint further,” he says.”The mining sector is obviously seeing cost pressures rise. Mining companies are competing with the east coast infrastructure builds and there will be margin pressures.
“My expectation is Australian economic growth will continue to moderate lower in line with most other developed economies. At the same time, cost pressures are rising so operating models are going to be hit and margins squeezed.”
Retailers have already flagged some early disappointments.Kathmandu highlighted disappointing Christmas results in early January, fashion retailer The PAS Group announced on Wednesday it expected earning to be at the lower end of its guidance andDavid Jones announced on Thursday its sales growth fell in the run up to Christmas.
Consumer confidence is also slumping, withthe Westpac-Melbourne Institute Consumer Sentiment Index showing pessimist consumers now outweigh the optimists.
Outlook statements are also unlikely to be positive during February as companies look to deflect a bleak outlook.
“In the end, it’s not only the earning result, it’s the guidance [that matters],” Sherwood says. “Companies tend to give ambiguous guidance and firms have really found the art of saying nothing.”
Clime’s Walker says domestically-focused companies in particular will likely signal a tone of caution. “The last thing they want now is the market to get ahead of them.”
The low bar of expectations presents an excellent opportunity for higher quality companies to shine, with Clime’s Walker and Perpetual’s Sherwood agreeing offshore earners are likely to do well.
“On the whole, the earnings season will show corporate Australia is struggling. The one area where I can see some positive earnings surprises are our offshore earners because a lot are exposed to the strong US economy,” Sherwood says.
“It’s easy to beat low hurdles if you’re a strong company. I think it’s going to be an earnings season where good companies shine. Strong growth in a strong economy can hide a lot of incompetence but it’s those firms that can protect their margins that will perform best.”
Direction from the US
The US market has already shown its willingness to reward companies that exceed low expectations. On Monday,Citigroup beat forecast profit estimates while on TuesdayJPMorgan Chase shares rose after the bank reported fourth-quarter profits two-thirds higher. On Wednesday,Goldman SachsandBank of Americareported results above expectation too.
The results mean US fund managers are tipping February will be a positive month for Wall Street and in turn global stocks.
“I think the US market will always be the bellwether and a strong earnings season goes a long way to ripple though global markets,” says THB Asset Management chief executive Christopher Cuesta.
“Stock prices are reflecting bear-market, recession-like values. I think you may have some numbers coming down but stocks going up. Even if a company lowers guidance, the share price might still rise because the results are not as bad as expected.”
Cuesta, who focuses on micro-cap opportunities,expects double-digit profit growth in the US driven by last year’s cut to company tax rates, particularly in smaller companies sheltered from the turmoil of the US-China trade war.
“In terms of profit expectations, we’re looking for 15 per cent earnings growth,” he says. “We’re still looking for topline growth and we should see earnings growth on top of that. Those are very strong numbers still and we’re excited about that. We think profits are going to be really strong and there are great valuation opportunities out there.”
Cuesta says while the US economy is still strong, companies are probably more likely to be conservative in their guidance amid continuing market volatility. “There’s still a lot of positives in the US economy. When we look at the dashboard of the US market, we think it’s a really strong backdrop,” he adds.
Larger companies are more likely to be conservative with their forecasts and outlook statements. “I think large-cap companies, considering what’s going on, will be more cautious,” Cuesta adds.
Morgan Stanley chief investment officer Mike Wilson, however, is more bearish on just what the earnings season will mean for markets.
“There’s a good chance companies will either disappoint with lower-than-expected results or guide lower for 2019,” he says. “We think there’s a good chance we’ll revisit the December lows over the next few weeks or months. Our advice is to be patient here and wait for the retest of December lows.”
Most local companies begin reporting results from February 5.