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Navigating the 2023 August reporting season: earnings estimates and market insights

Navigating the 2023 August reporting season: earnings estimates and market insights

In this week’s video insight, Roger Montgomery discusses the August reporting season for 2023. Earnings estimates are uncertain, and the economy’s strength raises concerns due to inflation and higher interest rates. Company fundamentals take centre stage as macroeconomic factors recede.


Hi I’m Roger Montgomery and welcome to this week’s video insight.

Today, we’re talking about the upcoming August reporting season for 2023. It seems like earnings estimates are on shakier ground this time around, and there are some interesting themes to watch.  

With reporting season underway, there are some concerns about the economy’s strength, especially after months of elevated inflation and higher interest rates. Soft trading updates from retailers in May and June have further reinforced this view.

During August and September, you should expect macroeconomic factors will take a back seat while attention shifts to company fundamentals.

FY24 earnings per share (EPS) growth for the ASX200 Industrials has halved from 12 per cent back in February to around 6 per cent today. While this may seem like a headwind, it’s important to remember that this growth rate is just marginally below the 20-year average EPS growth rate for ASX Industrials, which stands at about 7 per cent.

And with the demand slowing down and interest rates rising, the spotlight is back on balance sheets and gearing. Companies may consider fixing or hedging borrowing to manage debt obligations, especially with business lending costs increasing significantly.

Looking beyond Australia, we might be able to gain some insights from the U.S. reporting season so far. Positive margin surprises have been driving results there. However, sales misses have been met with punishment, possibly signalling reduced pricing power. And as analysts downgrade forward estimates, we must pay attention to our own market dynamics.

According to Macquarie’s equity market view, consensus estimates for earnings may be too high, and margins may not rise as expected next year. They also have a preference for defensive sectors like utilities, infrastructure, and insurers in the coming weeks.

But prices for defensives already reflect their preferred status. Meanwhile, a critical point to remember, though, is that earnings are all about margins. And Macquarie points out a red flag ­­­­­­– the split between falling margins and flat earnings per share growth hasn’t been seen since 2008, suggesting there’s still some optimism baked in, that may need to wash out.

Macquarie believes; “The net profit margin for the All Industrials has been falling in 2023, but the impact on EPS has been muted by rising sales as companies continue to pass on inflationary cost increases. This dynamic was last seen around the GFC, when margins peaked and started to fall before the U.S. recession began, they also added “We could see a similar sequence play out again over FY24 as inflation slows, especially if central banks continue to hike,”.

On a price to earnings (P/E) basis, Macquarie analysts noted that although sentiment and volatility may be depressed, valuations are certainly not.

Macquarie adds, “We also believe valuations will decline as earnings fall, as was more typical in the pre-quantitative easing (QE) environment before the GFC.” And I would add the All Industrials P/E is high, or its inverse, the earnings yield is low relative to current real bond yields and that’s potentially a risk. But I also note that we’ve got a combination of deflation and economic growth which is supportive.

As always, companies with a growing earnings profile, strong cash flow, and trading at reasonable valuations are the best places to invest as they’ll be less prone to earnings and share price erosion.

The top five holdings in The Montgomery Fund at 30 July were the Commonwealth Bank of Australia (ASX:CBA, CSL (ASX:CSL), QBE Insurance (ASX:QBE), Rio Tinto (ASX:RIO) and Cochlear (ASX:COH) and remember that Rio Tinto has already reported its half yearly results. The top five holdings in the Montgomery Small Companies Fund at 30 July are Bapcor (ASX:BAP), Macquarie Technology Group (ASX:MAQ), Alliance Aviation Services (ASX:AQZ), Seven Group Holdings (ASX: SVW) and Hub24 (ASX:HUB). 

We’ll obviously be watching the performance of these companies very closely.

That’s all we have time for. Thanks for joining us this week and I look forward to talking to you again next week, and the meantime continue to follow us on Facebook and Twitter.


Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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