With the ASX200 up around record levels, having recently nudged 8,500 points after posting returns of around 12% last year, most brokers aren’t so convinced that earnings levels can repeat last year’s performance.
Trading up around 18 times, the market appears to be overvalued against traditional price to earnings (PE levels) of between 15.8 and 17.4 times and in light of recent market dynamics investor confidence levels have been tested.
In light of board challenges across several sectors, uncertainty about United States President Donald Trump’s policies, interest rates and liquidity issues the market expects FY25 earnings per share growth (EPSg) to decline by 2.3%.
With that in mind, Azzet asked a fund manager and a sharemarket analyst to make sense of reporting season - also known as corporate confession season - what’s in store and any insights into what will define markets in 2025?
Structural shifts in market behaviour
At face value, Evan Lucas Melbourne-based independent share market analyst expects this reporting season to replicate those of years past, with most stocks continuing to beat at the revenue level and miss on the earnings front.
However, while it may appear to be business-as-usual this reporting season, Lucas expects the market to be less impacted by traditional cyclical shifts and more impacted by structural shifts in market behaviour.
That structural shift notes Lucas is evident within recently released data from Vanguard and BlackRock which shows that passive investing has overtaken active investing.
“Once you take out fees, research shows that active management reverts to mean (~average results) which means that this model is done,” Lucas told Azzet today.
In light of all the headwinds confronting equity markets in 2025, Lucas says what investors are looking for most this reporting season are clues as to what will move markets forward.
When trying to read and tease within company announcements, he advises investors to get a better fix on A) future capex expectations for listed stocks and B) whether borrowers have been overextended.
“On a sector-by-sector basis, it remains unclear who the clear winners will be but on paper it looks as if consumer discretionary should have already been a casualty,” says Lucas.
“While rate cuts will matter for property, the great unknown is whether this will move the dial in private investment.”
CBA and CSL signal the starter’s gun
Lucas expects updates from two ASX giants next week, namely Commonwealth Bank (ASX: CBA) and CSL (ASX: CSL) to set the tone for the reporting season.
Given that CBA accounts for 46% of all banking transactions, Lucas warns investors not to underestimate the bank’s role as a lightning rod for housing and credit market activity. Likewise, he expects CBA's business outlook commentary to reveal a lot.
“CBA has preempted its 1H with quarterly updates and in my view headline figures will be lower than last year with the exuberance having come out of the post-Covid housing market,” says Lucas.
“CBA will deliver an OK result, but at $5.8bn I expect cash earnings to underperform market expectations.”
Turning to CSL, Lucas expects the market to look to US sales, especially in light of geopolitical risks and Trump’s proposed changes to the health system.
A$ tailwinds
The decline in the A$ is expected to provide a tailwind for local industrials with international operations.
However, Roger Montgomery founder and chairman of Montgomery Investment Management reminds investors that it will raise the cost of inputs and add to the difficulties already experienced by many retailers.
As a result, he says sell-side analysts have been particularly active in small caps revising earnings over the past few months with negative revisions to Audinate (ASX: AD8), Next DC (ASX: NXT) and Megaport (MP1) and positive revisions to Life360 (ASX: 360) and Select Harvests (ASX SHV).
With the market pricing in a 95% probability of the Reserve Bank of Australia (RBA) initiating a new rate-cutting cycle on 18 February, Montgomery also reminds investors that rate cuts historically favour defensive sectors and cyclical stocks.
However, this time the impact may be nuanced.
“While defensives like Health, Staples, and Gold typically outperform in the year following an RBA rate cut, cyclical stocks – think media and retail – typically benefit from rate cuts as earnings recover from a low base after the economy has been crunched (necessitating the rate cut),” Montgomery told Azzet.
“However, earnings have not been significantly depressed this cycle, so the usual rebound may be muted.”
Sentiment and risks
Investor sentiment, adds Montgomery, has arguably cooled considerably since the euphoria following Trump’s election victory.
“The circa US$6 trillion injected into markets by Treasury and the Fed - running down the Reverse Repo account - fuelled the 2024 rally but that tactic is almost exhausted,” says Montgomery.
As a result, Montgomery echoes the sentiments of Lucas, suggesting the market is in need of further liquidity if it’s going to keep rallying.
Given that the U.S. semiconductor index has been virtually unchanged over nine months despite all the positive AI news, enthusiasm suggests Montgomery might be taking a break.
Meanwhile, with local valuations widely viewed as stretched, Montgomery suspects stocks could be vulnerable to a pullback if earnings fail to meet expectations.
If the market broadly views valuations as higher than average, he also expects stocks to be vulnerable to any announcement that doesn’t beat market expectations.
“With valuations reported by others as ‘frothy’ and with mixed earnings forecasts, companies face heightened scrutiny,” says Montgomery.
“Positive surprises may come from currency-sensitive international players, while defensive sectors stand ready to outperform if rate cuts materialise.”
However, overall, Montgomery says caution is warranted, particularly for cyclical stocks, where the absence of a low earnings base limits the potential for a robust rebound.
However, the industrials sector offers a glimpse of optimism, with expectations of greater than 1% EPS growth.
With all this playing out, investors should be prepared for volatility.
