Investors focus on outlook for corporate earnings

Investors focus on outlook for corporate earnings

By Ric Spooner (Chief Market Analyst, CMC Markets)

With little news in prospect to change investors’ outlook, today promises another quiet session for the Australian market.

The 13% rally in the S&P/ASX 200 index since June has largely been about PE expansion. Investors have reduced risk premiums and increased valuations in response to lower risks in Europe and central bank easing. Investor focus has now returned to the outlook for corporate earnings. Any significant gain in the index from current levels is likely to require an improved earnings outlook and not just valuation expansion.

Yesterday’s news had little to encourage those looking for improved company earnings. The ANZ job vacancy report was confirmation of soft labour market conditions. In these conditions, the consumer mood will remain cautious, dampening prospects for companies exposed to domestic discretionary spending.

The weak labour market leaves the chance of another rate cut prior to Christmas well in play. Lower rates are starting to become a real issue for Australian retirees whose income is dependent on interest earnings. Against this back drop and the confirmation of a weaker international outlook by both the World Bank and the IMF we may see further yield hunting by investors looking to switch out of the materials sector and into both defensives and the higher yielding bank stocks.
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