Could ASX earnings season be 'a lot better than what the market is positioned for'?

Companies are facing headwinds from higher inflation and interest rates along with supply chain snarls.

| More on:
two cute young boys dressed in business suits sit amid a pile of papers with a calculator and adding machine looking very happy for themselves.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • ASX earnings season commences in August
  • A period of earnings downgrades is expected before a transition back to ‘more normal multiples’, one expert forecasts
  • He also tips companies actually working to address supply chain issues and labour shortages could be rewarded

ASX earnings season is almost upon us.

Investors have been inundated with macro news surrounding global and national inflation levels and rising interest rates over the past months. Now we're about to drill into the company specifics.

Commencing in August, we can expect the majority of the 2,000-plus ASX listed companies to report their full-year results, and we're likely to see some volatility on some of those results.

In the first-half results reported six months ago, more companies beat earnings expectations than fell short of them.

But with rising labour and energy costs, supply chain snarls, and the above-mentioned rate hikes, there are some bearish speculations circling that this time around the number of companies falling short of guidance could be significantly higher.

James Gerrish, author of Market Matters, isn't among those bears. Speaking to Livewire, Gerrish said he believes "earnings season will be a lot better than what the market is positioned for".

Uncertainty ahead of ASX earnings season

Gerrish said there's a lot of uncertainty about what to expect from ASX shares when they report their earnings in a few weeks' time.

"The forecasting on one side is difficult, so we haven't seen a lot of analyst revisions leading up to it. When uncertainty is high, they tend to sit on their hands," he said.

However, the market hasn't been idle, with some big falls for the major indexes.

"We're probably priced for a recession," Gerrish said. "To me, I think that earnings season will be a lot better than what the market is positioned for."

According to Gerrish (quoted by Livewire):

I think there will be some big moves at the stock level. It's going to be the nuances on how companies are managing the uncertainty that really counts. I think we'll go into a period of earnings downgrade and re-rates to the downside. That's why we've seen an artificially depressed valuation in the market. But that'll change. You'll see a transition back to more normal multiples.

Look for companies walking the talk

It's easy for companies to say they're handling the uncertainties. But Gerrish advises looking beyond the companies, saying that's what they're doing to those actually walking the talk.

"It's the nuances in the statement, and the quality of the balance sheets," he said. "Not just throw away lines about managing uncertainty, but proper things they are doing to handle supply chains, lock in supplies at costs, manage wage pressures … real actions rather than hollow rhetoric."

Gerrish said investors might want to investigate ASX shares that have already been beaten down on expectations of increasing costs or decreasing earnings.

"You think about property, for one. There's a lot of Armageddons built into property stocks, in my view. You've got the upside potential for distributions," he said.

Gerrish named Dexus (ASX: DXS) and Stockland Corp Ltd (ASX: SGP) as property shares that could outperform.

He also tipped big-name retail shares Metcash Ltd (ASX: MTS) Wesfarmers Ltd (ASX: WES) as companies that will provide earnings certainty and some forward guidance.

However, income investors expecting another record half of payouts from the big miners could be disappointed.

"Earnings are high so dividend expectations are high. I think there could be some disappointment on the dividends announced by resources, energy companies, and the like," Gerrish said.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

Two excited woman pointing out a bargain opportunity on a laptop.
Opinions

2 great value ASX shares I want to buy

These stocks are high on my watchlist.

Read more »

Broker looking at the share price.
Share Market News

5 things to watch on the ASX 200 on Tuesday

Here's what to expect on the local market today.

Read more »

A young woman sits with her hand to her chin staring off to the side thinking about her investments.
Broker Notes

Down 16% in 6 weeks: Is this ASX 200 share a bargain buy?

Bell Potter has given its verdict on this beaten down stock.

Read more »

Ten smiling business people wave to the camera after receiving some winning company news.
Share Gainers

Here are the top 10 ASX 200 shares today

The ASX 200 enjoyed a strong start to the trading week today.

Read more »

Three people in a corporate office pour over a tablet, ready to invest.
Broker Notes

Leading brokers name 3 ASX shares to buy today

Here's why brokers believe that now could be the time to snap up these shares.

Read more »

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop
Opinions

1 ASX 200 dividend stock down 20% to buy right now

This beaten-up ASX share could be a top pick for dividends and stability.

Read more »

Man sitting in a plane looking through a window and working on a laptop.
Opinions

2 cheap ASX 200 shares I'd buy in May

I think these stocks are too cheap to ignore.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Share Gainers

Why Gentrack, New Hope, Nuix, and Star Entertainment shares are charging higher

These shares are starting the week strongly. But why?

Read more »