Stock market expectations for this earning season

The results are in as reporting season takes off in earnest with its first full week. The much anticipated earnings season is critical to understanding the direction of the market over the next 12 months, and could not have come at a more interesting time with the Australian market recently hitting a new all-time high.

So will reporting season be a big winner for investors or a warning sign of things to come?

What to expect this earnings season?

Analysts and investors look at reporting season with anticipation and sometimes trepidation because it brings with it heightened market volatility. Given that we are only one week into reporting season, volatility has been quite low, with the market only slightly lower than last week.

Hedge funds will often take advantage of reporting season and increase volatility by selling stocks that do not meet market expectations to make some quick profits. Many superannuation and index funds also rebalance their portfolios around this time, which adds to market volatility. And as some of the bigger companies are yet to report earnings, there will be quite a lot of noise in the market as analysts breakdown the results.

As I have mentioned many times previously, it is wise for investors not to react to the volatility but rather to wait for the dust to settle. Unfortunately, too many investors get caught up reading reports and market news, only to speculate on the direction of the stocks they hold, with many getting it wrong. This ultimately leads to buying stocks too early or getting out of good companies, which rise after the dust has settled.

Rather than focusing on earnings season, it is more beneficial for investors to look at the bigger picture and to start preparing to make the most of the upcoming opportunities in the market.

Companies reporting this week

Despite positive full-year earnings, Credit Corp was sold off heavily over the past week due to flat earnings and its dividend outlook. The company reported revenue of $324 million and a 9 per cent increase in net profit after tax.

While Credit Corp was down nearly 9 per cent early in the week due to an overreaction to the news, it recovered nicely, which is why I say investors should wait until the dust settles before making any decisions during reporting season.

Rio Tinto has been down nearly 10 per cent since May before reporting this week with the news positive for the miner. It clearly topped the forecasts, as it announced that not only were sales revenue and earnings up strongly but it would also lift its interim dividend up to US$1.51 a share and pay a special dividend of $0.63 cents a share.

While Rio’s share price increased on this news, once again I caution investors not to over react, as this great result has come on the back of increased iron ore prices after the Vale dam collapse, and as we know Vale has announced it will resume production soon.

Transurban, CBA, Suncorp, AMP, AGL, Mirvac and IAG all report next week. AMP is at its lowest price in history and CBA, Sun, and AGL have been struggling over the past couple of months, so next week should be interesting.

Communication Services was the best performing sector up over 2 per cent followed by Industrials up over 1 per cent. Materials was down just over 1 per cent closely followed by Information Technology, which was also down for the week.

As for the stocks in the ASX top 200, IPH has so far topped the list up over 8.5 per cent, while Orica was up over 7 per cent following positive news from its investor day this week. Vocus Group was also up over 5 per cent, which could be the dark horse for the month for those willing to tackle the wild ride this stock has been on over the past few months given that it has recently been a takeover target.

The worst performers include ABC, down over 20 per cent on profit downgrades followed by CYBG, which was down over 18 percent and Janus Henderson Group down around 15 per cent.

So what do we expect in the market?

While the medium to long term outlook for the Australian market is bullish, over the short term I expect it will move down around 8 to 15 per cent from its high by early October. It is possible that the high this week of 6,958 points is the all-time high before the market falls away, although I believe it is more likely that the market will rise for another two to four weeks up to around 7,200 points before falling into a low.

Anyone buying right now should do so with the expectation that you are buying for the short term. If you decide to hold your positions, you need to expect that some of the stocks in your portfolio will move down while the market pulls back. For now, stay calm and keep investing in good Australian stocks.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au