Earnings per share growth is forecast to surge by up to 17% as companies report half year results over the next month.
Analysts say the resources sector will be a main contributor as improved prices for commodities, on top of deep cost cutting and expanded volumes, feeds in to earnings.
Mining companies have been steadily setting results guidance higher and higher for the six month to the end of December.
“Steady forecast upgrades, accelerating in the past two months, look to be confirming a strong return to market earnings growth in FY17 after a number of years,” write Citi analysts Tonny Brennan and Mark Tomlins in a note to clients.
“Of course, the upgrades have essentially been to resource earnings, which are coming off a very low base, and reflect better global growth than envisaged a year ago and hopes of further improvement.
“But across the rest of the market EPS growth is expected to remain only moderate, despite estimates having been stable.”
This chart shows the upswing in prices for minerals and the expected steep jump in earnings per share:
Shane Oliver, head of investment strategy and chief economist at AMP Capital, says the December half results are likely to confirm return to earnings growth after a lean two years.
He says steady earnings upgrades for resources stocks on the back of the rise in commodity prices has seen the consensus expectation for 2016-17 earnings growth rise to 16% from around 7% just after the last reporting season ended in August.
Oliver says resource company profits are expected to more than double, but profit growth across the rest of the market is likely to be around 5% led by food producers and retailers, utilities, telcos and building materials companies.
Revenue growth for industrials and banks is expected to be constrained.
UBS says a key them to watch is payout ratios.
“Sector heavyweights BHP Billiton, Rio Tinto and Fortescue Metals Group should all show rising dividend payments,” write UBS strategists David Cassidy and Dean Dusanic.
“Fortescue Metals Group has the potential to increase its payout considerably form a low level in our view given the dramatic improvement in cashflow relative to the debt burden.”
UBS lists its reporting season potential upside surprises as Harvey Norman, Super Retail Group, Costa Group Holdings, JB Hi-Fi, Boral and Cleanaway.
On potential negative surprises, the ones to watch are Amcor, Monadelphous Group, InvoCare and Bendigo Bank.
UBS says 2017 earnings growth is expected to be much slower at 6% outside the resources sector.
CSL and Woolworths are expected to improve after a weak 2016. This weighted improvement is also somewhat positive for market prospects.