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.

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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.

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