Full year earnings growth is expected to be close to 20% when Australian ASX-listed companies report their 12 months results in August.
Analysis by Citi shows that forecasts have only moderated slightly despite concerns in recent months, including housing, the impending arrival in Australia of Amazon, bank levies and commodity prices, that have caused the ASX to trend lower.
“The usual confession season preceding results was relatively mild, with downgrades mostly limited to consumer stocks,” write analysts Tony Brennan and Mark Tomlins at Citi.
“This seems to partly reflect the fact that surveyed business conditions have been at their strongest levels since the GFC for most of the past year, and reasonably buoyant in an absolute sense.”
The June quarter Deloitte Access Economics Investment Monitor says the surge in company profits is the big story of the economy over the past year as investment in resource projects winds down.
Deloitte Access Economics partner Stephen Smith says company profits, before income tax, rose by almost one third over the year to March.
This was mainly driven by mining profits, which jumped 112%, after higher commodity prices in late 2016 and early this year flowed through to earnings.
“However, this is not expected to translate into additional large-scale mining investment, as higher commodity prices have since moderated and new supply continues to enter the global market,” says Smith.
Profits have also lifted outside of the mining sector, up by almost 17% over the past year.
“This is the fastest growth in profits seen in the non-mining sector since 2010,” Smith says.
For the reporting season next month, the analysts at Citi sees as many sectors with healthy or improving conditions as with tough or deteriorating ones.
Utilities, airlines, office property, and engineering sectors are all areas where some stocks are capable of beating expectations. These include Qantas, Origin Energy, Investa Office Fund, Dexus and Monadelphous.
The resource stocks, getting a lift from the recovery in commodity prices, are Oz Minerals, Santos, Regis Resources and Northern Star.
On the downside risk, consumer stocks are in the frame, including Wesfarmers, Tatts, Event Hospitality, Coca Cola Amatil and Asaleo Care.
Telstra, the Commonwealth Bank and Westpac could also slip.
Energy utilities have also indirectly benefited as the gas price rises, with reduced gas power production pushing up power prices.
“Building materials stocks are also expected to report continued good profitability with still high levels of residential construction and more infrastructure projects, and engineering companies are also expected to have more earnings from infrastructure, as the decline in resource project work also troughs,” write the Citi analysts.
“Meanwhile, for the insurance sector premium rates appear to be firming more, even if claims experience in recent months has seen some modest easing in growth expectations.”
Doing it tougher is retailing with subdued consumer spending.
Other sectors depending on discretionary spending, such as leisure and gaming, also seem to have a number of stocks at risk of disappointing.
In consumer staples, low price inflation is keeping grocery industry sales growth below long term trends, and competition remains robust.
“And then there’s the banks, facing slower asset growth with macro-prudential regulations strengthened, plus bank taxes and capital requirements set to dilute returns in the coming year, with latent risks as well around loan quality after the property boom,” the analysts say.
In the telecom sector, the NBN rollout and the planned entry of a fourth mobile network by TPG is driving capital expenditure and competition.
“The overall picture, then, appears fairly varied, but there are perhaps more sectors experiencing an improvement in conditions than the impression that might be taken from the concerns in the market and share price weakness over the last few months,” says Citi.