THE profit figures have come in thick and fast, and share prices have bobbed up and down, but investors - many still unnerved by the wild ride in global financial markets - are still coming to terms with an economy in two minds.
When the earnings season kicked off in earnest at the start of the month, world markets were gripped by panic. Shareholders have thus been relieved by a relative lack of nasty shocks from companies reporting their results.
Though a global meltdown has apparently been averted for now, analysts warn the risk of further earnings downgrades in industrial stocks remains high - particularly for companies lacking exposure to the booming resources sector.
"You could argue [earnings expectations for] industrials still need to come down a bit more, and certainly there's a lot of uncertainty in guidance," Deutsche Bank strategist Tim Baker said.
"And as AGM season rolls around, you might find that corporates are still pretty cautious on the outlook, which could lead to more downgrades," he said.
David Cassidy, an equity strategist at UBS, said the "overwhelming theme" of this reporting season had been the increasingly divergent two-speed economy and its effects, including on manufacturers and retailers who continue to struggle against a high dollar and soft consumer demand.
"The drag from the currency and the soft retail demand was pretty evident in a lot of results," Mr Cassidy said.
Surfwear clothing brand Billabong and electronic retailers JB Hi-Fi and Harvey Norman have struggled under "recession-like" trading conditions. Department store giants Myer and David Jones have issued hefty profit downgrades before their results next month.
For Macquarie Bank's Tanya Branwhite, the haves and have-nots of the China-led resources boom can be summed up by the opposite fortunes of two companies.
"The way to read the two-speed economy is to contrast BHP on one hand and look at BlueScope Steel on the other," Ms Branwhite said.
While BHP Billiton announced a record $22.6 billion annual profit, the company it spun off nine years ago, steel maker BlueScope, slumped to a $1 billion loss and announced it would axe 1000 jobs as it reeled under the impact of a high dollar and cheap imports.
Mr Baker said analysts had revised their growth forecasts downwards for next year, but said the consensus of about 14 per cent growth for industrials had implicitly built in over-optimistic assumptions about a swift return to consumer confidence.
"I just think that could prove to be false hope," he said.
"What we're seeing are not cyclical challenges for the economy, we're seeing structural challenges and they're not going anywhere."
The volatility in US and European markets left investors downbeat - and perhaps short-sellers upbeat - leading into reporting season. Transport stocks such as Toll, and media stocks such as Seven West and Fairfax, were heavily sold before their results, but they rallied sharply after - in line with guidance.
Earnings for contractors were broadly flat, with UGL and particularly Transfield punished for issuing lower-than-expected guidance.
Food and beverage stocks such as Coca-Cola Amatil and Foster's were affected by cold weather and flooding in Queensland and Victoria.
These natural disasters and many more worldwide led to disappointing results for insurers QBE and IAG.
Banks and wealth managers reported largely in line with expectations.
Frequently Asked Questions about this Article…
What does the article mean by a 'two-speed economy' and why does it matter for investors?
The 'two-speed economy' described in the article refers to a sharp divergence between sectors: companies tied to the China-led resources boom (like miners) are doing very well, while many manufacturers, retailers and other non-resources companies are struggling. For everyday investors this matters because sector exposure is driving very different earnings outcomes and stock performance — so understanding which parts of the market are benefiting or suffering can help set expectations during reporting season.
How has the resources boom affected big miners versus manufacturers?
The article contrasts BHP Billiton, which announced a record $22.6 billion annual profit, with BlueScope Steel, which slumped to about a $1 billion loss and said it would cut 1,000 jobs. This illustrates how the resources boom has lifted miners while a high Australian dollar and cheap imports have hit manufacturers hard.
Which retail and consumer-facing companies struggled during the reporting season?
Several consumer-facing names faced 'recession-like' trading conditions or profit pressure, including Billabong, JB Hi‑Fi and Harvey Norman. Department store groups Myer and David Jones also issued hefty profit downgrades ahead of their results, reflecting weak consumer demand and currency headwinds noted in the article.
Are analysts warning of more earnings downgrades for industrial stocks?
Yes. The article reports analysts — including Deutsche Bank's Tim Baker — cautioning that earnings expectations for industrials may still need to come down and that corporate caution around AGM season could lead to further downgrades, particularly for companies without exposure to the booming resources sector.
How did natural disasters affect insurers and food & beverage companies?
Cold weather and flooding in Queensland and Victoria hurt food and beverage sales for companies such as Coca‑Cola Amatil and Foster's. Those and other worldwide natural disasters also produced disappointing results for insurers QBE and IAG, as noted in the article.
What happened to transport, media and contractor stocks during the earnings season?
Transport stocks like Toll and media names such as Seven West and Fairfax were heavily sold ahead of results because of market volatility, but they rallied sharply after reporting in line with guidance. Contractors’ earnings were broadly flat; UGL and especially Transfield were penalised by the market after issuing lower-than-expected guidance.
Did banks and wealth managers meet investor expectations in this reporting season?
According to the article, banks and wealth managers generally reported results largely in line with expectations, so they were not a major source of surprise during this reporting season.
What should everyday investors take away from this mixed earnings season?
The key takeaways are that market volatility and a divergent economy mean earnings are patchy across sectors: resources are strong, while manufacturers, retailers and some service sectors face real headwinds from a high dollar, weak consumer demand and weather-related impacts. Investors should be aware that analysts expect further uncertainty and potential downgrades in some industrials, so paying attention to sector exposure and company guidance during reporting season is important.
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