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Macquarie Group Ltd (ASX:MQG) picks the biggest FY19 upgrades and downgrades

The S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is running higher today and could soon retest its decade and a half high from last week thanks to the reasonably upbeat profit reporting season.

The focus is not so much on the FY18 full year results but the outlook for the current financial year. On that front, things may not be as rosy as what you might think.

Macquarie Group Ltd (ASX: MQG) consensus estimates on FY19 earnings growth have been cut by 145 basis points to 12.1% since the start of the reporting season with downgrades evident across banks, industrials, resources and property.

“Similarly, on a stock level, 58% of companies that have reported have had their FY19 earnings forecasts downgraded,” said the broker.

“Majority of these downgrades have come from ASX 100 stocks, with the average downgrade of -3.8% vs the average upgrade of +2.3% excluding Resources.”

Rising costs, a slowing property market, greater regulatory scrutiny and higher than expected capital expenditure are some of the factors contributing to the earnings downgrade, although the weaker Australian dollar and the expected drop in electricity prices due to government intervention should offset some of this pressure for some in the S&P/ASX 100 (Index:^ATIO) (ASX: XTO).

The stocks that have enjoyed the biggest FY19 earnings per share (EPS) upgrades include utility ERM Power Ltd (ASX: EPW) with a 298% uplift, baby products retailer Baby Bunting Group Ltd (ASX: BBN) with a 22.5% upgrade and fund manager Magellan Financial Group Ltd (ASX: MFG) with a 7.8% increase.

Having a big profit upgrade doesn’t necessarily make the stock a buy but stocks in this group tend to outperform the market over the next six months, if not longer.

The one that I think stands out is Baby Bunting. The stock may have surged on the back of its results and is no longer cheap, but I think it’s well placed to enjoy further consensus upgrades over the course of FY19.

Among those that suffered the biggest cuts to their FY19 EPS include online jobs site SEEK Limited (ASX: SEK) with a 15.5% downgrade, annuities company Challenger Ltd (ASX: CGF) with an 8.1% reduction, port and logistics operator Qube Holdings Ltd (ASX: QUB) with a 7.1% cut and our national carrier Qantas Airways Limited (ASX: QAN) with a 7% decrease.

Again, not all of those suffering a downgrade should be dumped and some have even rallied on their results, like Qube Holdings.

However, most in this group are likely to struggle to make significant gains over the next year, especially if they have enjoyed a strong share price rally leading into the reporting season.

There are other blue-chips that are set to outperform in FY19. The experts at the Motley Fool have picked three of their favourite blue-chips and you can find out what these are by clicking on the free link below.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited and Magellan Financial Group. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia has recommended ERM Power Limited and SEEK Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.