Earning Season: Prep starts now

We are less than three weeks away from the ASX earning season and we are less than two weeks away from the earnings season in the US. So, we need to start prepping for trades and opportunities now. 

First and foremost, do not forget that confession season is well and truly upon us here in Australia. Downgrades clearly have been coming from the discretionary sector; we’ve even seen companies hit the wall with the likes of Booktopia going into administration. 

There are some clear thematics that are growing in the Australian market. Energy, while the worst performing sector for the financial year 2024, may actually show you that earnings were slightly above expectation on higher than expected oil prices. 

Materials led in the main by BHP, Rio and FMG Have once again benefited from higher than expected iron ore prices. It also benefited from a lower than expected AUD/USD where average FX prices were expected to be between $0.68 and $0.73 but instead have averaged between $0.63 and $0.67. What we’re looking for is operational costs, overall margins and forward looking guidance, something that these firms have lacked in the last three financial updates. Watch very closely for the excitement that will come from things like copper at the expense of the issues that are facing nickel lithium and other transition metals that have had really tough periods in FY24.

Moving to the banks this is a sector people argue is fully valued. It’s not hard to argue when through the financial year CBA made record all time highs several times and is still within a whisker of its record all time high. Higher interest rates will indeed improve net interest margins. However, the unknown question and what we need to see at its August full year earnings is the impact higher rates are having on bad and doubtful debts, the possible increase in provisioning and more importantly the impact its having on new loans and refinancing. There is an argument to be made that banking is possibly fully priced and no matter what result is delivered won’t necessarily create a leg further higher.

Finally, you can’t go past consumer staples and discretionary. Retail sales numbers over the last 18 months have actually shown discretionary spending At or above 2022 levels although month on month figures have been erratic. The question that will come for discretionary spending is margins and how much sales revenue translates to the bottom line in earnings and profit. Staples on the other hand have seen consistent movement on the revenue line but the question will be the margin and after the very targeted senate inquiry into supermarkets any sign profits are above trend may actually be met with concern as geopolitics raises its head.

33 times in 2024 the US 500 and the Tech 100 have made record highs – can it continue?

Look into the US and the ending season that it is about to undertake. We have to look at several core thematics that are likely to be raised.

Artificial Intelligence (AI)

The question you’ve got to ask is: is the time frame long or short? We raised this Mag 7 stocks etc Microsoft, Amazon, Alphabet, apple have clear potential. They are evolving their business models and see the integration of AI as the future of their individual businesses. That will likely come up in their numbers but it will come with operational and initial upfront costs as the integration of AI begins. This is all long term may not fully capture short term opportunities which is still presenting very much in the semiconductor providers. 

NVIDIA and Advanced Micro Devices are taking full advantage and monetizing the compute cycle. This clearly won’t be forever because it will go from semiconductors to infrastructure to software and therefore the flows will move back towards the bigger end of town but overall the AI thematic still flows towards the semiconductors for now and that’s likely to be shown in the earnings season that’s coming.

Data Centres

That brings us to data centres because the potential for ensuring AI requires a heck of a lot of storage and a heck of a lot of processing. There are estimates the data centres will need to grow by 420% in Europe and 250% in the US by 2035 based on the rate of growth in AI right now. Therefore, we need to watch providers like Dell Technologies and Intel which are big providers of data centres currently. We think the market hasn’t fully appreciated DC needs in the AI revolution.

Cybersecurity

The final key theme in the AI data centre technology space that we also think needs to be watched is cyber security. It’s been something along the lines of a 70% increase in ransomware attacks over the past 24 months. The regulatory requirements and the budgets required to deal with these increased threats is only just beginning. That brings players like Fortinet to the fore IT programmes and it’s pensively to develop programs for enterprise makes it an interesting one going forward.

GLP-1 ‘Weight Loss’ Medicines

Another theme of being a really strong driver of the S&P 500 is the rise of GLP-1 medicines. The weight loss craze that has come off the back of this Amazon has been incredible. Initially obviously developed for diabetes but having an additional effect of weight loss has created a product out of nowhere. Eli Lilly and Co is a key player in this space with its GLP one class medicines already approved by the FDA. It’s been launched in the US and its oral intake has posted adoption. It is not the only one in this space but shows very clearly the impact weight loss medicines are having on earnings. The caveat we have though is side effects and long term impacts are still being found and could be said as a capping issue on price.

Whatever way you look at it the US dating season however will be incredibly exciting and it is the reason The US markets continue to see huge capital inflows as they are much more exciting in this current environment than traditional value markets such as Australia.