With HY24 reporting season finished, there has been some softening in the consensus outlook for both FY24 and FY25 earnings growth that we think is more attributable to prevailing views on the possibility, or not, of rate cuts globally.
Inflation fell across HY24 and there was only one rate rise of 25 basis points in the 6-months from July to December 2023, compared to 400 basis points in the year and a half that preceded. Ausbil believes that we are at the start of a rate-cutting cycle in terms of the direction of rates, though the quantum and timing remains unknown.
The overall macro-economic outlook has improved with rates peaking, and inflation falling, and with Australia’s excess savings, strong employment market and global demand for our resources, Ausbil expects Australia to avoid recession.
In this environment, we believe earnings growth will recover more than the market expects, broadening across sectors, and moving down the market cap spectrum.
We think that with a downward bias in rates, cyclicality will return to the market, with more relief for the consumer, supporting housing, consumer, select real estate and other cyclical businesses.
Decarbonisation and the energy transition remain significant themes that will drive value across resources, energy, utilities and the mining services sector with respect to critical commodities.
We are also seeing structural earnings growth in technological transformation, the rise of artificial intelligence (AI), and the enablers and businesses that increasingly operate in the digital environment, including communications companies.
On aggregate, we see earnings growth for FY24 as a little more positive than implied by consensus as companies are now settling into operating in a normalised interest rate environment.
Our macro reading of the economy is that rate cuts will come from central banks while economic growth remains positive, though sub-trend, mainly in order to ensure that real interest rates are not a hinderance for longer term business investment.
In terms of the overall EPS outlook, market consensus currently expects earnings contraction in FY24 of -3.5% for the S&P/ASX 200, then a return to earnings growth of +2.5% in FY25.
We think this will also see economic growth strengthen, and earnings growth for FY25 exceed consensus expectations as well as earnings recover and broaden across sectors, and down the market cap spectrum.