Will ASX earnings and dividends beat the odds and rise this year?

The last four weeks have painted a rich tapestry of the Australian stock market. And nowhere is this more apparent than in the disparity between consumer stocks' earnings. For instance, Wesfarmers (ASX: WES) marginally beat analyst estimates while the exodus of its CEO alongside an earnings miss sent Woolworths (ASX: WOW) shares south.

But for a lot of the market, earnings have held up better than expected. As Steve Johnson, CIO at Forager Funds Management described it, "It hasn't been good, it's been down but it's been better than expected." And there is no question that relatively resilient earnings have allowed the ASX 200 to stay near all-time highs on an index level.

So what do all the numbers of the last four weeks really say about the state of corporate Australia - and where are the best of the best investing their money given what has been handed down?

To find out, we bring you the Signal or Noise February Reporting Season episode. Joining AMP's Diana Mousina and myself are two veteran stock pickers who also have a strong macro nous:

• Steve Johnson, CIO at Forager

• Daniel Moore, Portfolio Manager at IML

This episode was taped on Wednesday 28 February 2024 and first appeared on Livewire Markets. You can watch the video, listen to the podcast, or read our edited summary.

EDITED SUMMARY

Topic 1: The disconnect between macro data and earnings expectations

Source: Refinitiv, Wilsons Advisory

Diana: SIGNAL - Earnings expectations in Australia are lower than they are in the US, but economic growth is also expected to be lower than stateside. The two are moving in line and that makes for an important signal moving forward.

Steve: NOISE - Markets are forward-looking beasts. With earnings holding up better than expected (read: good but not great, better than the worst-case scenario), it's very much a sector and stock case-by-case basis.

Daniel: SIGNAL - Daniel is more worried about FY25 and FY26, arguing there are some "punchy" numbers which, when combined with expensive valuations, suggest that it's a "recipe for vulnerability".

Topic 2: Is this the peak for earnings in the ASX consumer space?

Source: StreetAccount, ASX Releases

Steve: NOISE - He thinks we've seen the peak for earnings expectations for retail and some consumer stocks. Furthermore, he is not convinced that consumer strength will last much longer even though earnings have been far better than expected.

Daniel: NOISE - While expectations were very low, there are some notable trends around margins and in particular, the rising fixed costs for retail businesses. Those trends should continue, in his view.

Diana: NOISE - The outlook for the consumer this year may look even worse than last year. Even though AMP is expecting rate cuts this year, a rising unemployment rate and rising mortgage repayments could lead to more downside in these stocks.

Extended Conversation: The inspiration for this segment came from a piece recently penned by Andrew Tang of Morgans Financial. We asked our panel to share their thoughts on whether they think it's time to move out of defensive stocks and into cyclical or growth-oriented names.

To find out their answers, watch the video.

Steve's Chart: Fixed Rate Home Loan Expiry Schedule

Source: Commonwealth Bank of Australia

Daniel's Chart: The effect of higher rates on different consumers

Source: Commonwealth Bank of Australia

Topic 3: Is the ASX 200's 4% dividend yield at risk?

Source: Market Index

Daniel: SIGNAL - He thinks there is the most vulnerability among the Big Three (BHP (ASX: BHP), Commonwealth Bank (ASX: CBA), Rio Tinto (ASX: RIO)) dividend payers.

Diana: NOISE - The Australian share market may see earnings come under pressure but given companies are so attuned to the need for dividends, huge cuts are probably not likely.

Diana's Chart: The percentage of companies increasing earnings and dividends

Source: Macrobond, ASX, AMP

Steve: NOISE - A lot of these major dividend payers were actually conservative during the boom times, Steve argues. The BHP's and Rio Tinto's of the world had more capacity to pay out if they wanted to - but chose not to. He argues there is capacity to increase payouts as long as the soft landing outlook continues to be priced in.

How are these investors now positioned given what has been discussed?

Steve: February presented a "motley crew" of ideas, giving potential investment ideas for cash that has been looking for a home. There are a lot of expensive defensives, but he also argues many solid names are trading on 5-6x earnings. Some of those themes that the Forager theme likes include the tourism and travel theme, as well as doubling down on the fund's largest individual holding.

Daniel: Given earnings expectations for popular stocks are so high, Daniel is looking for companies where margin growth is reasonable and within historical norms alongside valuations that "make sense". (e.g. Don't pay record valuations for Wesfarmers). Ironically, the inspiration for Daniel's top stock pick came from a meeting he was at before he came in to tape this episode!

Diana: The AMP teams have a more multi-asset lens, and have not shifted their views greatly in the last month. They remain overweight global equities relative to Australian stocks.

To find out Steve and Daniel's favourite stocks following the February reporting season, watch the video.

Signal or Noise returns on April 2nd with its first global multi-asset show for 2024.