Numbers on the table

It's that time of year again when Australia's biggest companies open their books and reveal all: the "earnings season".

It's that time of year again when Australia's biggest companies open their books and reveal all: the "earnings season".

In the next few weeks, the share market will be flooded with figures on companies' performance from the past financial year and carefully crafted "outlook" commentary on what the future may hold. Clearly it's a big deal for the sharemarket professionals. But what should small investors make of it all?

If you have shares, or are thinking about buying some, the twice-yearly earnings season provides the chance to hlook at key gauges of company performance, such as what they're paying in dividends. It can also be a time when share prices move significantly.

But whether it's a good time to buy or sell depends on more than a company's profit or dividend performance: the other critical factor is market expectations.

So how are expectations shaping up this year? Put simply, they have been deteriorating. The graph shows there have been several months in which ASX 200 companies have issued more profit downgrades than average.

A swag of household names have cut their profit guidance, including Woolworths, Coca-Cola and Coles owner Wesfarmers. It's not only the miners who are struggling but also the companies exposed to household spending.

Reflecting this sombre mood, market analysts have reined in their profit forecasts. AMP Capital's Shane Oliver says that in February analysts were expecting ASX 200 companies to record average profit growth of 12 per cent in 2012-13 financial year just finished, but this forecast is now 0.5 per cent.

"There's a good chance that with all those earnings downgrades the bad news is factored in," Oliver says.

The catch is that the market remains fairly upbeat. Oliver says the market is betting on fairly strong profit growth of 12 per cent for the year ahead, implying a significant improvement. This suggests that for stocks to "outperform" they must still clear a fairly high hurdle.

There are good reasons to think the worst might be behind corporate Australia: lower interest rates and a weaker dollar, for instance, are positive for profits. But the fact is markets are still factoring in a substantial improvement over the coming year. Will this happen? Who knows.

But a key factor to watch will be chief executives' views on the future. Interpreting CEO comments can be frustrating - they are sometimes deliberately obtuse. However, they have more information at their disposal than the rest of us. If the bosses appear cautious about what lies ahead it may signal the market has been overly optimistic, just as it was six months ago.

Confession season

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