Earnings Season Outlook – August 2024

To view our interactive Reporting Season calendar and Bell Potter’s forecasts and recommendations, click here. 

This reporting season is set to be one of the biggest in years as we analyse how listed companies on the ASX fared the high interest rate, sticky inflationary environment of FY24. Despite some key inflation drivers easing throughout the last financial year, companies have had to adapt to the idea of ‘higher rates for longer’ as the RBA is struggling to tackle key sticky inflation drivers like housing prices, services inflation, wages, retail spend and unemployment. What this has meant for companies is higher costs to wear or pass onto customers, thus eating at margins amid a decreased demand environment for some key sectors.

While some sectors have surprised with outperformance in FY24, others that would traditionally perform well in a high interest rate environment have come under pressure due to geopolitical tensions, China’s struggling economic recovery and changing consumer tastes.

China’s post-pandemic economic struggle has been a central theme of caution across the markets over the past few reporting periods and remains a key concern for companies with exposure to the region in FY24. From iron ore, to retail sales, sluggish trade balance data and declining economic growth, the world’s second largest economy is hurting earnings for companies with exposure to the region for a second straight reporting season.

For our retailers it is bad new with China’s retail sales falling from highs of 34% growth in retail spend in 2021 to just 2% growth in the latest reading for June 2024.

The price of iron ore has also succumbed to easing demand with a 1.9% fall over the last year, despite showing resilience over H1FY24, as subdued demand from the world’s largest importer (China) led to eased exports from some of Australia’s mining giants.

What are we expecting heading into reporting season for FY24?

All eyes will be on the ability of large cap stocks to report earnings appreciation in order to justify the high valuations that have resulted from the record-setting bull rally of H2FY24.

With easing GDP and subdued economic activity expected to remain for the latter half of CY24, investors will be hawk-eyeing the outlook of companies and how they adjust prices, costs and strategies to adapt to the prolonged higher interest rate environment and rising global economic uncertainty.

The tech-rally locally has been driven by the AI revolution stemming from the magnificent 7 in the US. For investors that are heavyweight in Australia technology stocks, the 27% returns YTD from the sector rally has driven valuations up beyond what some analysts believe are fair. This reporting season it is key to assess outlook for earnings growth in the sector and runway to profitability. Annual recurring revenue, subscription price increases and monthly active users are key metrics to review when digesting the annual reports of tech stocks. Be wary of companies in this sector that say they are investing in AI to enhance operational efficiencies vs actually making a meaningful investment with a specific outcome expected from investment in AI.

Looking back at the reporting season of February 2024, half year results, 42% of companies beat expectations, while 30% met expectations and 28% missed expectations. The August reporting season will likely see some shift in the number of beats as companies faced higher costs and tight economic conditions throughout the second half of FY24, which many alluded to in the outlook reported for 2H24 in the February results season.

For companies that introduced price increases in the first half, we should see some material financial benefits come through this August in full year reports. James Hardie (ASX:JHX) announced an increase of 4%-6% across its products from January 2^nd this year, Boral (ASX:BLD) increased prices and cost efficiencies in the first half of FY24, and Ansell (ASX:ANN) increased the prices of chemical products.

Healthcare stocks have come back with a bang in 2024 as some key companies cycle out of the pandemic focus and into commercialisation of the drugs and treatments they have been developing for many years. Telix Pharmaceuticals (ASX:TLX) recently revised its revenue guidance for FY24 upwards in light of strong performance of its prostate cancer imaging agent Illucix, whilst earnings outlook is strong for the company as it prepares for regulatory submission for a number of other therapies and imaging agents.

Consumer discretionary stocks may face some headwinds this reporting season as investors prepare for eased earnings growth in the high cost of living environment and outlook for eased retail spend. While some retailers like City Chic (ASX:CCX) are winding up operations in North America, Accent Group’s (ASX:AX1) Nude Lucy brand is preparing to expand into the region amid growing demand for affordable athleisure wear. Inventory levels are a key metric to assess in FY24 results for any retailer. Those that hold a high level of inventory will face tough headwinds in a slowing consumer spend environment as they face the difficult task of reducing inventory levels at high discounts or even write them off.

With the rise of AI, will this drive demand for AI PCs and other technology related to the global tech transformation? JB Hi-Fi (ASX:JBH) will be a stock to watch this earnings season to determine the demand for AI tech.

A mixed bag is expected across the commodities space this reporting season. The subdued iron ore price and demand out of China has seen higher supply than demand over the last financial year leading to stockpiles of the commodity at shipping ports. The eased price of the commodity is likely to impact the earnings results of the big miners this reporting season, however, with diversified portfolios of assets and strength in copper and some base metals, the decline in iron ore earnings is likely to be offset by strength in other commodity sales.

Uranium miners are also looking strong this reporting season with a global ramp up in demand for nuclear power.

And, of course, the ongoing gold price rally topping US$2400/ounce has driven strong tailwinds for gold miners in FY24. Heightened global geopolitical risks, central banks buying up bullion, inflation hedging, interest rate outlook, decoupling from US yields, and increased demand from investors for gold’s safe-haven nature are the key drivers pushing the gold price to record highs and fuelling ongoing tailwinds for gold producers into FY25.

Utilities stocks are also in a strong position to benefit from the rising demand for AI. The power, energy and water required to run the increasing number of datacentres globally is placing high pressure on the services delivered by utilities companies which leads to demand tailwinds for the sector. Origin Energy (ASX:ORG) and AGL Energy (ASX:AGL) are two companies poised to benefit from the AI-driven increase in demand over the coming years.

In summary, this reporting season the key areas for investors to assess are:

• earnings outlook in the high-cost environment
• price increases and/or cost cutting to maintain margins
• macro impact on the sector and stocks in your portfolio
• valuation vs earnings outlook
• inventory for retailers and the outlook for impact on the retailer’s target market from higher interest rates
• inflationary outlook impacting earnings growth into FY25
• how companies respond to underperforming sectors (e.g. Domino’s Pizza closing underperforming stores in Germany and Japan)
• AI exposure is not just limited to the tech sector, utilities are also poised to benefit from the AI revolution.

This information is general in nature and does not take into account your financial situation, objectives or needs. You should consider whether it is appropriate for you. You should read our Financial Services Guide and any relevant Product Disclosure Statements before making an investment. For more information visit belldirect.com.au or call 1300 786 199. Bell Direct is the trading name of Third Party Platform Pty Ltd ABN 74 121 227 905, AFSL 314341.