UBS predicts steeper profit decline for Australian companies in fiscal 2024

Australian companies listed on the S&P ASX 200 index are expected to face a steeper profit decline this fiscal year compared to last. According to UBS, profits are projected to fall by 3.5% in fiscal 2024, a larger drop than the 2.9% decrease experienced in the previous year, Reuters reported.

This decline is attributed to the normalization of profits following the exceptionally high earnings during the COVID-19 pandemic.

The Australian financial year begins on July 1 and ends on June 30 each calender year.

Banking, consumer staples and retail to be most impacted

The sectors anticipated to experience the most significant impact include banking, consumer staples, and retail.

These sectors are coming off earnings peaks set last year. In contrast, insurers are expected to perform better due to improved profitability.

With financial services companies making up over 20% of the ASX 200 benchmark – in terms of market capitalisation – traders and investors typically watch the earnings reports of these stocks closely, given their potentially outsized impact on the broader market.

According to KPMG, in the first half of 2024, Australia's major banks reported a combined profit after tax of $15 billion, down 10.5% compared to the first half of 2023 and an average of 0.3% from $15.1 billion for the second half of 2023. Income was broadly flat, the pace of margin erosion slowed and operating expenses reduced modestly compared to second half of 2023.

Additionally, companies with exposure to the U.S. market might benefit from a weaker Australian dollar, potentially offsetting some of the profit declines.

Market trends and valuation

Despite the anticipated profit declines, the S&P ASX 200 index has risen by 4.7% so far this year, even hitting a record high in mid-July.

The index saw a 7.8% increase over the entire year of 2023.

However, UBS warns that broad-based share price increases will be challenging due to stretched valuations. The corporate forecasts for the remainder of the fiscal year will be crucial in setting the tone for the stock market over the next six months.

In March this year, Fitch Ratings had forecasted that weak consumer and business sentiment will continue to have an acute impact on Australian corporates’ profits as domestic spending patterns adapt to economic pressures. This was also owed partly to issuers navigating rising volatility, driven by evolving geopolitical dynamics, global market weakness and strategic changes to meet climate emission-reduction targets.

Upcoming earnings reports

The earnings season will kick off with mining giant Rio Tinto reporting on July 31, followed by other significant companies like BHP Group and Fortescue at the end of August.

Rio Tinto is expected to report underlying earnings of $5.79 billion for the six months ended June 30, according to a consensus estimate collated by Visible Alpha from 13 analyst forecasts, reported by Dow Jones. A year ago, the company reported underlying earnings of $5.72 billion.

Investors will closely watch these reports to gauge the overall health and future prospects of the market.