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Are ASX stocks about to get an earnings upgrade boost in the new year?

asx share price upgrade to buy represented by hand drawing line under the word upgrade
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The spectacular 10% jump in the S&P/ASX 200 Index (Index:^AXJO) in November prompted doomsayers to predict an imminent violent crash.

The ASX 200 is trading at around 20 times forward price-earnings (PE) compared to its historical average of around 16 times.

Some experts believe a day of reckoning is just around the corner as too much good news is priced into the market.

ASX stocks about to receive an earnings upgrade

But there’s one thing that these pessimists aren’t counting on. This is a consensus profit upgrade as the economy tries to escape the pull of the COVID‐19 recession.

I know it sounds a little far fetched but the ASX being in a cum-upgrade cycle may not be such a crazy thought, according to Macquarie Group Ltd (ASX: MQG).

“We still suspect analyst forecasts are too conservative, as ASX 200 earnings rose just 1% even as stock prices rose 10%,” said the broker.

“All else being equal, by bringing forward the end of the pandemic, we think the positive vaccine news should have led to earnings upgrades for the December half of Calendar 2021.

“The PE spike in Covid-19 losers is likely the market signalling that EPS [earnings per share] upgrades are coming.”

ASX COVID losers on an earnings upgrade path

The COVID-19 losers refer to ASX stocks that have taken the brunt of the market sell-off since the pandemic.

These include the Webjet Limited (ASX: WEB) share price, the Flight Centre Travel Group Ltd (ASX: FLT) and the Unibail-Rodamco-Westfield CDI (ASX: URW) share price.

Why ASX miners will also get upgraded

Another group of ASX stocks that is almost certain to be upgraded is mining. The price of iron ore spiked yesterday after Vale SA downgraded its 2020 and 2021 production guidance.

The supply shortfall is a boon to the BHP Group Ltd (ASX: BHP) share price, Rio Tinto Limited (ASX: RIO) share price and Fortescue Metals Group Limited (ASX: FMG).

Analysts had been expecting the iron ore price to weaken from current levels. But the new demand-supply imbalance means this view will need to be revisited. This spells earnings upgrades for our iron ore producers.

Other tailwinds supporting the Santa Rally

But earnings upgrades aren’t the only reasons to feel bullish about the near-term performance of ASX stocks.

“After the strong returns last month, there is a fear of a near-term pullback, but we could still see a Christmas rally,” added Macquarie.

“Australia is well positioned with RBA QE on automatic pilot (i.e. at least $5bn per week), plus fiscal stimulus and a lack of domestic Covid-19 cases.”

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and Webjet Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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