This chart is a good sign for Australia’s corporate earnings outlook

Australian business conditions, as reported in the monthly NAB business confidence survey, are currently the strongest they’ve been since before the global financial crisis, and that bodes well on the outlook for Australian corporate earnings.

Here’s why.

Source: Citibank

Courtesy of Tony Brennan and Mark Tomlins, members of Citibank’s Australian equity strategy team, it overlays the NAB’s business conditions index against earnings revisions from Australian ASX 200 listed companies.

There’s a clear relationship between the two, and one that Brennan and Tomlins says could see market earnings forecasts upgraded in coming months.

“At this stage only low single digit market earnings growth is forecast for financial year 2018, and the market price-to-earnings ratio is also lower than it’s been at times in recent years at around 15.5 in an environment of still low interest rates,” they wrote in a note this week.

“This is even with business conditions reported as the best since the GFC, and profitability across the market return on equity not particularly high, having come down in the large sectors such as resources, banks, supermarkets and insurance. So earnings could get upgraded.”

Brennan and Tomlins say that Australia’s utilities, airlines, office property and engineering sectors contain firms that are capable of beating expectations (ORG, QAN, IOF, DXS, MND), along with certain resource stocks (OZL, RSG, STO, RRL, NST).

On the other side of the ledger, they see increased risk of earnings shortfalls among consumer stocks (WES, TTS, EVT, CCL, AHY), telecoms (TLS), and the banks (CBA, WBC).