The August 2023 reporting season highlighted the resilience of the domestic economy despite growing headwinds from higher inflation and rising interest rates. Overall aggregate EPS growth for the broader market for FY23 was flat, with double digit earnings declines in the Resources sector offset by strong growth from Industrials and Banks. Earnings growth forecasts for FY24 have edged lower over August and September, with market EPS expected to grow c.2% in the financial year.

Earnings downgrades for FY24 were mainly driven by the Resources sector, with sector earnings now expected to decline in FY24, driven by lower commodity price expectations and higher costs. BHP’s costs grew 10% over the year, and the company expects the lagged impact of inflation to continue into FY24, particularly in labour costs. This is a trend that is evident across the commodity complex, with the cost of mining production now expected to be higher than it was prior to the pandemic. This in turn implies that commodity price support is also expected to be higher than in previous cycles, with low-cost operators set to capture potentially higher relative margins in certain commodities.

Bank earnings have continued their strong rebound post the COVID-impacted trough in FY20, with higher interest rates and positive credit growth boosting Net Interest Margins to multi-year highs. FY24 does look more challenging for the sector, with higher costs, elevated levels of competition, and the lagged effect of the 12 RBA rate rises over the past 16 months all set to erode margins over 2024.

At the sector level, Consumer Discretionary was surprisingly the best performing sector over the month, gaining 5.7% in response to better-than-feared results and trading updates. Discretionary retailers have broadly managed costs well over FY23, but heading into FY24, margins are likely to remain under pressure as sales growth moderates.

At the stock level, within the ASX200 universe, Mineral Resources, James Hardie, Origin Energy, Cochlear and Altium reported stronger than expected performances, while Wisetech Global, Ramsay Healthcare, Seek, South32 and Amcor delivered relatively weak results and forward guidance.

In terms of themes, cost and capex inflation, weakening consumer spending and inventory management dominated discussions and outlook statements over the reporting period. To-date, the market as a whole seems to be navigating these headwinds relatively well, with many companies passing on the additional costs to end consumers, where possible, to protect their own margins. However, passing on higher costs is likely to get more challenging from here, as consumers remain under pressure from the rising cost of living.

Looking ahead, consensus estimates are suggesting 2% growth in earnings in FY24, but this is likely to remain volatile over the year, with macro factors expected to have a larger than usual impact on the earnings trajectory of the market in 2024. At the sector level, a sustained rebound in commodity prices, particularly iron ore, is likely to drive earnings upgrades within the Resources segment over the second half, while amongst the banks, a continuation of very benign loan arrears and impairments could be a catalyst for upgraded expectations for earnings and dividends in FY24.

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