During the past month, most ASX listed companies reported earnings results. Overall, results have been better than expected as forecasts were set quite low given a range of macroeconomic risks.
Inflation has impacted input costs, in particular wage inflation. In fact, it has been reported that treasury analysis shows the average fulltime salary above $100,000 and rising. Corporates have been reasonably successful at passing cost-price increases through to customers to maintain profit margins (so far). The ‘price gouging’ debate appears focused on costs to customers rather than costs throughout the supply chain. Inflation influences interest rate decisions which impacts the cost of capital (borrowed money), another cost to businesses.
Surprisingly to most, the best performing sector during reporting season was consumer discretionary despite earnings going backwards. The consumer is more resilient than expected, perhaps due to a few extra dollars in their pay-packet.
Corporate profits appear to be slowing, as reflected by broadly subdued corporate earnings outlook statements. The market is forward looking, and this is already priced into expectations.
We continue to recommend businesses with resilient profit margins, demonstrating pricing power, balance sheet flexibility and operating in favourable sectors.
Alex Leyland