Investors in the Australian sharemarket have become too complacent about the health of the economy despite the August reporting season pointing to a sharp slowdown in consumption and housing, with stocks trading at levels that strategists say look detached from reality.
Equity strategists noted that inflationary pressures popped up in the company results of almost every sector of the sharemarket, driven by the spike in oil prices that has increased energy, diesel and transport costs.
That pressure was reflected in last week’s hotter-than-expected inflation print, which prompted the market to flip the script on the interest rate outlook and price in a fourth increase by the Reserve Bank of Australia by the end of the year.
It is a far cry from the first week of reporting season, when a dramatic scaling back of interest rate expectations and hopes of an imminent end to the US-Iran war had helped lift the Australian sharemarket to a record high.
“There is clear evidence of a weakening economy,” said Morgan Stanley equity strategist Chris Nicol, citing softer credit growth, falls in transactional velocity and the so-called consumption flywheel becoming compromised.
“The recent changes in fiscal tax policy, less reflexivity in monetary policy, and a broad deleveraging pulse unfolding has only just started to become visible in the C-suite narrative and outlook.”
Nicol added that the potential for another interest rate rise this year raised the risk to company trading updates released towards the end of the year.
Analysts have responded by slashing their forecasts, with S&P/ASX 200 company earnings expected to grow 9.3 per cent in the current financial year, down from 10.7 per cent a month ago and nearly 13 per cent two months ago.
And despite analysts revising profit estimates at a ratio of three companies downgraded for every two that were upgraded during August, Nicol warned that the deteriorating profit outlook was not reflected in the sharemarket.
The ASX 200, which edged higher in August and is just 2 per cent away from its all-time high, is trading on a lofty forward price-to-earnings multiple of nearly 18 times, which is far above its long-term average of about 15 times.
“It appears overly optimistic to suggest that the unfolding trading environment is in the price when the market is near all-time highs, price-to-earnings multiples are elevated, and clear pressure is on the aggregate earnings pulse,” Nicol said.
Trading updates since the start of July showed the slowdown in consumer spending, with sales growth tracking at about 2.2 per cent from a year ago. That is down from the 3.5 per cent growth in the February reporting season.
Source: https://www.afr.com/markets/equity-markets/asx-investors-overly-optimistic-as-analysts-slash-profit-forecasts-20260831-p60sxk