The latest Gross Domestic Product (GDP) figures and the reasonably benign August reporting season give the distinct impression that things are steady as she goes.
Don't be fooled into a false sense of security. If you dig beneath the headline figures, you will uncover some big cracks that will make FY18 a bumpier ride than what you might be led to expect.
For one, the quality of the good results during the reporting season (outside of resources) was pretty poor even though broker upgrades were pretty much in line with past reporting seasons.
If you are looking for the cracks, Goldman Sachs has highlighted a number in the latest reporting season where good news was hard to find.
The first is that the second half profit figures (relative to consensus expectations) were some of the weakest in its 22-year dataset. The vast majority of companies rallied on their results only due to the fact that the market had been too pessimistic about their prospects as we headed into August.
On the flipside, the list of companies that got significantly de-rated due to large earnings downgrades is long.
Another disturbing observation is the 7.3% earnings per share growth that consensus forecasts have pencilled in for industrial companies in the current financial year. Nearly half of this growth is expected to come from margin expansion, but Goldman Sachs thinks that might be wishful thinking given rising prices for energy, raw materials and potentially wages.
This doesn't mean that there weren't any large cap reporting season heroes (stocks that enjoyed consensus earnings upgrades). Goldman Sachs splits these heroes into three groups – those that missed their numbers (but still got upgraded), those that reported in-line results, and those that beat consensus expectations.
Goldman Sachs puts iron ore miners BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (FMG) into the first group, while the likes of AGL Energy Ltd (ASX: AGL), Bendigo and Adelaide Bank Ltd (ASX: BEN), Downer EDI Limited (ASX: DOW) and JB Hi-Fi Limited (ASX: JBH) fell into the second group.
In the third group, the broker has listed Flight Centre Travel Group Ltd (ASX: FLT), IOOF Holdings Limited (ASX: IFL), Origin Energy Ltd (ASX: ORG), Perpetual Limited (ASX: PPT) and Qantas Airways Limited (ASX: QAN).
The broker has also classified the losers (those that suffered consensus earnings downgrades) into three similar groups. This list is long, but the notables in the first group include BlueScope Steel Limited (ASX: BSL), Domino's Pizza Enterprises Ltd. (ASX: DMP) and Telstra Corporation Ltd (ASX: TLS).
The second group include names like Brambles Limited (ASX: BXB), Insurance Australia Group Ltd (ASX: IAG) and Primary Health Care Limited (ASX: PRY), while the last group has Northern Star Resources Ltd (ASX: NST), ResMed Inc. (CHESS) (ASX: RMD) and Tabcorp Holdings Limited (ASX: TAH).
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