Macquarie analysts last week warned of “growing earnings risks” that could undermine profit growth for the financial year.

Broker anticipates a healthy 13.6% rise in corporate earnings per share for full-year 2022, but warned of downside risks to its outlook from a ‘mid-cycle downturn’ .

“A downturn cycle and hawkish central banks make for a tough earnings season – stocks with a downside surprise could be disproportionately punished,” analysts said.

“We also have COVID-19 related disruptions, rising labor and other input costs, shortages as well as the waning boom in the goods economy.”

Fortescue Metals Group said in January that cost inflation was 20%. Dairy group Bega Cheese has pointed to “major cost increases” ahead of its official earnings report when the earnings season kicks off in the coming weeks.

“There are absolutely cost pressures, and it’s definitely a headwind for earnings,” said Robert Gregory, portfolio manager for Glenmore Asset Management.

Rising prices will impact businesses differently, but “you can expect high-quality businesses to increase their prices over the next 12 months,” he said.

Margin pressure

Banks – among the winners in a rising rate environment – ​​will face stiff competition in the mortgage market, which has weighed on margins.

CBA shares fell sharply in November when the company warned of tighter margins, spooking investors, and are down more than 10% from the peak.

“For banks, this reporting season will be tough on the margin front as you face continued low rate pressures and competition in the mortgage market,” Janneke said.

As higher interest rate expectations pushed two- and three-year fixed rates higher, “the mortgage market has really started to be a big four margin pressure point,” he said. -he declares.

Materials

Miners, another mainstay of the local market, faced a mixed run in the December quarter which included the effects of inflation.

“WA-based businesses are clearly seeing cost pressures. Diesel increased. Labor availability is very difficult,” Mr. Gregory said. “The one thing that resource companies have had in their favor over the past six to 12 months is that commodity prices have been very supportive.”

The price of iron ore fell sharply from its all-time high of over US$230 ($329) a tonne in May last year, but remained above analysts’ bleak forecasts last year and soared on the belief that Chinese demand will remain strong.

The price fell below $90 a tonne in November, according to FastMarkets MB, but has since surged to $138 a tonne at the end of last week, bolstering the outlook for Australian global miners.

It has been a frantic race for energy commodities, with the continued stress facing the European gas market; geopolitical issues with Russia, a major gas supplier; and underinvestment in fossil fuels without sustained renewable energy performance, which has benefited local energy groups.

Groups like Santos, which sealed its merger with Oil Search in December, and Woodside, which took over BHP’s oil business, are among the beneficiaries of rising energy prices. Woodside said in a January update that it hit record sales in the December quarter.

Coal companies, however, faced a local headwind from heavy rains. In a January trade update, Whitehaven Coal cut its forecast due to weather impacts from La Nina and staffing issues caused by COVID-19 infections.

The consumer discretionary sector is one that has become vulnerable to some of the pandemic crosswinds facing Australian businesses, as the economy enters the third year of a pandemic.

Travel agencies, which fell during the crisis, are once again in the crosshairs.

travel crisis

Qantas announced in January that it would reduce its planned domestic capacity by 10% given WA’s decision to keep its border closed. Webjet and Flight Center are also facing a huge hit to bookings given the rise in omicron cases locally and overseas.

Wesfarmers, which dominates the sector, highlighted the weak performance of its K-Mart and Target chains in a January update that said competing retailers also struggled during the period. However, the blue chip was backed by the ever-reliable Bunnings Warehouse, which is one of the largest ASX-listed companies.

“Whether it’s because of omicron or people fearing they won’t be able to travel on vacation and have self-isolated, the revenue bias, especially for domestically-focused discretionary businesses, will be weaker than the market predicts,” Mr. Janneke said.

Despite the lackluster outlook for corporate earnings and the painful decline in Australian shares in January, Mr Janneke said the corporate updates would help shine a light on favorable corners of the market that had become cheaper through selling.

Investors will focus “on business fundamentals and less on the macro,” he said.

“What has been driving the market over the past few months has been the macro. I wouldn’t be surprised if we get a relief bounce in companies that have been heavily sold.