This reporting season, ASX earnings misses are being punished harshly

A research note from Morgan Stanley published on Monday highlighted earnings misses for ASX-companies this reporting season are being punished by shareholders to a degree not seen since 2016. 

“What is interesting this season is the outsized drawdown in share price reaction to earnings misses and/or outlook disappointment,” the team wrote. 

“Earnings misses [vs. internal estimates] have been punished more than 2x the average – the worst since the August 2016 reporting season.” 

It’s not just earnings. The same effect is also being witnessed in reaction to guidance downgrades. 

At the time of publication (Sunday 19 February 2023), over 60% of market capitalisation was accounted for in reporting thus far. 

Consumer resilience wavering & RBA on radar

Morgan Stanley’s analysts also highlighted cracks in consumer resilience, with further pressure expected to build. 

As the investment bank’s team see it, the AU macro backdrop of expected further RBA rate hikes was “priced in” for housing and banking outlooks respectively.

At the same time, shareholders are palpably being drawn towards growth opportunities. 

“Results for quality stocks like CSL (ASX: CSL) and Goodman Group (ASX: GMG) were met with increased interest and demand, whilst disappointment — whether it be actual results and/or guidance — has led to much larger drawdowns,” analysts wrote. 

Mixed positivity in EPS performance 

Analysts also highlighted on Monday that Earnings Per Share (EPS) performance is outpacing earnings misses, with earning beats ahead of misses. 

There is, however, a caveat. This reporting season, the analysts state, companies failing to meet estimates is a stronger driver of performance than beating estimates. 

This suggests that even after the ASX’s historic January rally, there is still a good deal of caution in collective investor psychology, and less of a willingness to hold onto stocks with less-than-flattering results.

“Yes, beats are ahead of misses (1.4x) —  but the alpha has been in avoiding the misses,” analysts wrote. 

“Investors are showing much less forbearance with regard to poor execution and/or a change for the worse in outlook.” 

In other words, one could argue the sellers are in control this season. 

CSL's one year chart at close on Monday