With $40b of profits in the bag, the recovery gains momentum

AS THE earnings season reaches its tail end, the worst of the global financial crisis appears to be over for much of corporate Australia. With nearly $40 billion worth of profits handed down over the past month, signs are emerging the recovery in earnings is gaining momentum.

Although the proportion of companies that have beaten expectations for the first half of the 2013 financial year was similar to the last few years, expectations among analysts of future earnings growth had improved.

"For the first time in three years, a majority of companies [54 per cent] are seeing their earnings forecast upgraded," Deutsche Bank's head of equity strategy, Tim Baker, said.

Companies including miner Newcrest, retailer JB Hi-Fi, transport group Asciano and Insurance Australia Group were among the big names to come in ahead of the market's expectation of profit. However, among those to disappoint investors was Tabcorp, energy interest Origin and mining services companies Boart Longyear and Drillsearch.

Mr Baker said dividends had come in better than expected. While net profits after tax were fairly flat for the first half of the 2013 financial year, dividends were up 1.3 per cent.

David Cassidy, UBS' head of strategy, said companies' earnings had so far been fairly steady according to forecasts, with expectations for the year ahead more realistic than they had been previously.

"I don't think we're going to an upgrade cycle, but we look to have passed the downgrades," Mr Cassidy said.

Earnings growth for the industrial sector picked up, but were driven by so-called defensive companies such as telecommunications and those operating healthcare, while cyclicals - companies that are dependent on the ups and downs of the economy - remained stagnant, Mr Baker noted.

The main disappointments have been second-tier resources stocks, which were less able or willing to cut costs like their bigger counterparts, and mining services companies, which have been hit by their clients' cost-cutting, Deutsche Bank's head of research sales, Glenn Morgan, said.

UBS' Mr Cassidy said the markets were starting to price in stabilisation or a potential turnaround for stocks in a range of sectors such as discretionary retail and steel.

"Quite a lot of the domestic cyclical sectors are starting to rally. I don't know if the market is going into an upturn, but the fact that earnings looked to have based out has been enough to see a lot of these share prices jump given how cheap they were," he said.

While the broader market is tipping double digit growth in profit for corporate Australia, Nomura strategist David Jennings was more bearish over the outlook. He was tipping earnings expectations for the 2014 financial year were likely to fall as they have in previous years.

"Our take away from this reporting season is that we are not at the beginning of an upgrade, but rather this is a bit of a breather and reality is going to have to bite pretty soon," Mr Jennings said.

"We're still looking for the market to fall back from these levels by the end of the year."

Corporate chiefs generally sounded a cautiously optimistic note over the health of the economy.

Commonwealth Bank chief Ian Narev said that while risks remained in the economy, if the current stability continued this would translate into a "slow but steady rebuilding of consumer and business confidence".