By Gus McCubbing
Australia’s largest companies are expected to record a second year of weaker earnings thanks to a softer economic environment, which UBS says should be enough to at least pause the relentless “melt-up” in equities that has pushed the ASX to record levels.
Rio Tinto is the first of the blue chips to post results when reporting season kicks off next week, along with ResMed and Pilbara Minerals.
Mining and energy companies are expected to act as the biggest drag on the bourse, with earnings for the sector tipped to tumble almost 20 per cent.
“The fact we are about to complete the third financial year where there’s been no material earnings growth from the Australian equity market is largely a product of the resource equities,” said UBS equity strategist Richard Schellbach.
“They’ve been in a very painful earnings downgrade cycle as they readjust to the post-COVID world of more balanced commodity markets. Outside of resource equities, things were never actually that bad.”
Overall profits for companies on the S&P/ASX 200 Index are forecast to drop 1.7 per cent this financial year, according to consensus analysts.
That follows a 5.4 per cent decline in 2023-24, and growth of just 0.4 per cent in 2022-23.
UBS noted that softening economic growth would affect earnings results, with the expected boost from two interest rate cuts from the Reserve Bank of Australia this year yet to materialise.
“The macro landscape remains tough,” Schellbach noted in the report. “There is likely to be a continued skew towards earnings disappointment, such that eventual profit growth falls slightly more.”
Even so, the lacklustre earnings results are not expected to completely derail the equities rally that has pushed the ASX 200 up 19 per cent from the US tariff-related market rout in April to a record high of 8757.2 last week.
While UBS has increased its year-end target for the ASX 200 to 8650 from 8150 that was set in the aftermath of US President Donald Trump’s tariff shock in April, it’s still down almost 1 per cent from current trading levels. Late last year, the target was set at 8850.
‘A powerful force’
Schellbach said that to justify the ASX 200’s current price level, earnings estimates would not only have to be maintained, but the market would have to keep trading at its current premium multiple.
“This would seem challenging, but sentiment and momentum in equities is a powerful force to fight in the post-pandemic world,” he added.
One bright spot are the so-called “new world” businesses, with the ASX’s technology-related sectors expected to record earnings growth of almost 30 per cent in FY25. Outside of tech, however, earnings are tipped to be more “lacklustre”.
After one of the ASX’s most volatile reporting seasons on record at the start of the year, SG Hiscock’s portfolio manager Phillip Li said the market reaction this earning season would be “sharp and immediate”. Much focus would also be on businesses that are exposed to tariffs.
“The market will be watching closely to see where those costs will be absorbed along the supply chain, and whether management can offset them through pricing, cost discipline, or new revenue streams,” he added.
Li also warned that consumer sentiment had not been helped by the RBA’s recent decision to keep the cash rate on hold, adding that depleted consumer savings were “not encouraging”.
He said consumer discretionary companies, which have relied on promotional activity to retain revenue, were still facing cost pressures, particularly around wages and rents.
Schellbach has also flagged a higher likelihood of “incremental downgrades spreading across the domestic-focused sectors of the market”.
Still, UBS expects earnings to bounce back in the 2026 financial year, with overall growth of 5.3 per cent, led by the ASX 200’s healthcare, consumer and tech sectors. Bank earnings, however, are expected to fall back to just 0.5 per cent growth in 2025-26, up from 6 per cent this year.
Wilson Asset Management’s investment analyst Sam Koch, who covers the smaller end of the sharemarket, said he was “cautiously optimistic” ahead of reporting season, noting higher property prices and stronger capital markets supporting investor sentiment.
“There’s been a few IPOs, as well as a number of secondary raisings and transactions, and that highlights the confidence the market has right now,” Koch said. “It’s much more open than it was 12 months ago, which is a welcome added dynamic.”
