Here’s what history tells us about ASX 200 returns in August

The ASX 200 wrapped up a solid July where the Index rallied 2.88% on bullish tailwinds including elevated macro surprise momentum (e.g. better-than-expected US GDP), disinflation traction, an RBA pause and still-solid US earnings.

Since 1992, July has been the third best performing month of the year – Up an average 2.19%.From a seasonal perspective, last month’s performance was in-line with expectations. 

While historical data is only a rough guide – August tends to be a bit of a lull ahead of September, otherwise known as the worst performing month of the year.

ASX 200 historical monthly average performance (Source: Market Index)

The trend is somewhat similar in US markets, where August and September are the two worst performing months of the year.

S&P 500 Index seasonality (Source: Sentiment Trader)

Going back to the ASX 200 – From a daily performance perspective, the market has historically logged zero gains between August and mid-December (aka the onset of the legendary Santa rally).

ASX 200 seasonality June 1992 to March 2023 (Source: Market Index)

Placing seasonality aside – What’s the current state of play?

Macquarie says the market’s earnings per share expectations fell another 1.8% in July, which marks the first back-to-back month of material EPS declines for this downgrade cycle.

“With earnings falling, the rise in the market is still driven by the kind of PE expansion you often see when investors expect policy easing to drive a new earnings upgrade cycle,” the analysts said.

“But in the absence of higher unemployment, we think inflation is likely to remain at a level that constrains RBA easing.”

A more extreme narrative has taken place in the US – Where the S&P 500’s price-to-earnings rallied from last October lows of 15.3 to 20.3 last week. But Jurrien Timmer, Director of Global Macro at Fidelity argues that there isn’t much room left before earnings need to do their heavy lifting.

A little over half of the S&P 500 has reported second quarter earnings (as at 31 July) and the blended earnings growth was running at approximately -7.5% year-on-year, below the -7.0% expected at the beginning of earnings season.

As for the upcoming August reporting season, Macquarie expects FY23 EPS to “come in a bit better than flat after +15% a year ago.”

“The 4% fall for the June half currently looks like the trough, but we think it will be pushed out as FY24 is downgraded. From +10% late in 2022, FY24 is already down to +1%,” the analysts warned. 

“Due to the lagged effect of past rate hikes and margin pressures, plus negative orders signalling a fall, we think FY24 EPS will be closer to a 10% drop by year-end.”