By Sneha Kumar (Reuters) – Corporate Australia kicks off its half-year earnings in full swing next week, and while modest growth is expected, traders will scrutinise whether profits justify stretched valuations, particularly in the face of challenges including U.S. tariffs. The ASX200 benchmark was last trading at more than 18 times future earnings, a roughly […]
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Australian companies’ high valuations face a crucial earnings test
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By Sneha Kumar
(Reuters) – Corporate Australia kicks off its half-year earnings in full swing next week, and while modest growth is expected, traders will scrutinise whether profits justify stretched valuations, particularly in the face of challenges including U.S. tariffs.
The ASX200 benchmark was last trading at more than 18 times future earnings, a roughly 11% premium to its average valuation over the last decade – largely due to an unprecedented rally in financial stocks last year.
And while the broad market is widely expected to post flat or modestly higher earnings, a miss to expectations threatens to tip companies off their high valuations.
“The February reporting season offers a crucial window into corporate Australia’s health … with earnings slowing in aggregate, valuations appear to have less room for error this season,” analysts at retail stockbroker Morgans wrote in a note.
Heightened global trade uncertainty due to U.S. tariffs on trade partners including China, a weakening Australian dollar, and the possibility of fewer interest rate cuts have put valuations squarely in the spotlight.
Morgans analysts do not predict blue-chip firms with sound fundamentals will miss earnings forecasts, but an upside surprise to growth will be needed to justify any further expansion to valuations, they said.
Financials, a bellwether sector led by Commonwealth Bank that registered a staggering 28% rally last year leading to concerns of stretched prices, are primed for decent earnings growth as they benefit from high interest rates, Morgans and UBS analysts said.
Australian banks will see a “relatively benign reporting season” characterised by stable margins and solid credit growth, Citi analysts said, although stretched valuations and high expectations are “seemingly at odds with the modest core earnings outlook”.
Elsewhere, weakness in resources firms continues to be an overhang on the broader market.
The sector is staring at low to mid double-digit earnings declines led by BHP Group, according to brokerages including Morgans, Citi and UBS, which cited weak Chinese commodities demand and higher operating costs.
While analysts believe the sector is starting to provide “value on offer” to investors after a dismal performance last year – the worst since 2015 – Citi equities analyst Liz Dinh believes “persistent demand-side concerns and geopolitical risk overshadowing the improving valuation metrics”.
Retailers, another major component of the Australian market, are expected to register a strong first-half on an uptick in household spending, with interest rate cuts in the second-half of the year potentially further boosting spending.
“We expect the rate sensitive sectors of tech, consumer discretionary and real estate stocks to attract investors in the latter six months of the year,” said Grady Wulff, a market analyst at Bell Direct.
(Reporting by Sneha Kumar in Bengaluru; Additional reporting by Aaditya Govind Rao in Bengaluru; Editing by Sameer Manekar and Jamie Freed)