By Gus McCubbing
ASX investors should buckle up for another wild earnings season given a proliferation of outdated earnings forecasts from analysts and wide variations in the numbers.
The rise of passive investing and the increasing presence in the Australian sharemarket of pod shops and quant funds, which trade on daily market events, means small beats and misses from a company during the reporting season can trigger outsized share price reactions.
And against that backdrop, investors are worried about the ongoing shockwaves from the Iran war, a potential unwinding of the artificial intelligence trade and rising borrowing costs from the Reserve Bank of Australia.
Morgan Stanley equity strategist Chris Nicol warned that the August reporting season could be even more turbulent than the past two, which were already the most volatile on record. One red flag, he said, was the growing dispersion in analysts’ estimates for companies on the S&P/ASX 300 Index.
The dispersion measure captures the level of disagreement among analysts about the future profitability of a company, with higher levels of dispersion indicating higher uncertainty. The data showed earnings dispersion had increased to 10.6, from 9.7 in February, well above the 20-year average of 10.
“Widening dispersion suggests consensus forecasts may be becoming increasingly stale, potentially creating greater scope for estimate revisions and earnings surprises,” Nicol said in a note to clients.
“We see building risks to earnings and outlooks for domestic-facing equities, in particular banks, housing linked, and consumer facing [companies],” he added.
Morgan Stanley highlighted several companies in the resources sector that had above market estimate dispersion, including lithium miners Liontown and IGO, as well as gold producers Ramelius and Newmont.
Others on the list include Whitehaven Coal, oil and gas producer Santos, cancer diagnostics giant Telix Pharmaceuticals, poker machine maker Light & Wonder and family tracking app Life360.
Companies that reported earnings that either just beat or just missed forecasts during the past two reporting seasons triggered wild swings in their share prices. One prime example was REA Group, which tanked 8 per cent on result day in February, despite missing revenue and earnings estimates by just 1 per cent.
Macquarie’s head of global quantitative research John Conomos blamed February’s volatility on high-frequency trading, quant funds, passive money and hedge fund pods aggressively trading known catalysts such as earnings results. Technology had also made it easier to trawl through information.
But Morgan Stanley’s Nicol said another factor was that nearly 30 per cent of ASX 300 companies had an average earnings estimate age of 80 days or more, while 53 per cent had estimates that were at least 50 days old.
Choppy times ahead
The age and dispersion of earnings estimates, combined with both the Iran war and the federal government capital gains tax reforms, meant that the August reporting season could be more turbulent than February.
“Consensus forecasts may be increasingly lagging underlying company fundamentals amid heightened market volatility, evolving policy settings and ongoing geopolitical uncertainty,” he said. “As a result, the potential for estimate revisions and earnings surprises appears elevated heading into the August reporting season.”
Fundamental Investment Management portfolio manager Simon Conn said he was bracing for a potentially grim August because Australia’s economic outlook was troubling.
“There are questions over inflation and interest rates, so the next three to six months will be choppy on the ASX,” Conn said. “The August reporting season will be interesting – we’re not expecting too many people to say the outlook is fabulous.”
Wilson Asset Management’s Damien Boey said the recent sell-off in chipmakers and memory stocks over concerns about whether hyperscalers would keep spending trillions of dollars on AI, could also play a role during the earnings season.
The sell down was turbocharged on Friday when Chinese start-up Moonshot unveiled its new Kimi K3 model that competes with the capabilities of top-tier offerings by the US AI giants Anthropic and OpenAI.
“We expect to see further volatility during earnings season, especially given unresolved geopolitical issues and fluid AI dynamics,” Boey said.
Solaris Investment Management chief investment officer Michael Bell said his top concerns were inflation, cost pressures facing ASX-listed companies, and the ongoing turmoil in the Middle East.
“Companies with pricing power should be able to pass through higher costs without impacting profitability, whereas sectors like retail are more exposed to margin compression if they’re unable to do the same,” he added.
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