ASX 200 set for strongest earnings growth in four years. UBS says buy miners, sell banks

Reporting season is fast approaching, and it won't be long until we see how companies navigated a year shaped by geopolitical uncertainty and macroeconomic pressure. Company commentary is likely to flag interest-rate pressure, a slowing consumer and housing market, Middle East supply-chain disruption and elevated oil prices, among other headwinds.

Even so, the ASX 200 is expected to post its strongest earnings growth in four years, according to UBS. This article looks at the one sector carrying much of that load, and where the experts are positioned across the rest of the market heading into the results.

FY26 earnings a mixed bag

Consensus forecasts point to 12% earnings-per-share growth for FY26, though a recent UBS note attributes much of that to recovering mining profits. Strip out the resources and financials sectors, and growth drops to 2.5%. 

“The reporting season therefore begins with solid index-level earnings expectations, but a considerably less compelling growth profile across much of the domestic corporate sector,” said UBS strategist Richard Schellbach.

Profit forecasts are also now being revised lower across all 11 major ASX sectors, including resources, which had previously provided much of the market's positive revision support. UBS says this broadening downgrade cycle raises the hurdle for companies to outperform in August, with results needing to both meet expectations and offer enough guidance confidence to arrest further cuts to forward estimates. 

Valuations moderated from a key risk

Valuations tell a similar story at 19.1x forward earnings. UBS says the median non-resource ASX 200 stock still looks expensive against its longer-term history, but since Covid, investors have been willing to accept a smaller equity risk premium. On that basis, current valuations sit within the recent five-year range, leaving Australian equities no longer looking unusually pricey against US-led global markets. 

Over the past 12 months, the broker notes the clearest valuation compression has come through in healthcare, technology and communication services. On balance UBS sees valuations as more reasonable than cheap, which puts the emphasis back on earnings delivery and forward guidance as the next drivers of relative performance.

UBS sector picks leading into results

Heading into results UBS has outlined where it is positioned:

Overweight

• Mining: keeps its support from AI and data centre investment, with comparatively favourable earnings momentum and has strong global investor interest. 

• Industrials: carries the market's strongest sector-level earnings momentum, relatively attractive valuations and exposure to mining capital expenditure, infrastructure, data centres, defence and energy spending.

• Healthcare: has become more compelling after heavy underperformance and de-rating, helped by improving price momentum and the potential tailwind of a weaker Australian dollar.

Underweight

• Banks: flags rate rises, sticky oil prices and the recent budget tax changes as continuing drags, and sees valuations as too optimistic for a slowing earnings picture, with property-related tail risks building.

• Consumer discretionary: the call to leave underweight rests on rates. UBS expects an August RBA hike to squeeze spending and confidence, reads valuations as priced for better conditions than the macro supports, and notes its quant team's crowding work showing flows turn sharply against the sector.

• Real estate: residential prices now falling, and as with the banks, the August hike UBS expects is what keeps it from buying into the sector's heavily de-rated names.

Countdown to ASX reporting season

With reporting season only a week away, the headline growth starts to look like a thinner story once mining and financials are stripped out. This season will turn to earnings delivery and forward guidance, rather than cheap valuations.

UBS is backing sectors with structural earnings support and steering clear of the housing and consumer slowdown, and August will test how well that positioning holds. With a potential rate hike on the horizon at the RBA's August 11 meeting, it is shaping up to be an eventful month.