Corporate Australia Half-Year Earnings Preview: Valuations Under Scrutiny

Next week, Corporate Australia launches its half-year earnings season. While modest growth is anticipated, traders will closely examine whether profits justify current elevated valuations, especially given challenges like U.S. tariffs.

At over 18 times forward earnings, the ASX200 benchmark is trading at an 11% premium to its average valuation over the past decade, primarily driven by last year's unprecedented rally in financial stocks.

Despite expectations of flat or modest earnings growth for the broader market, a failure to meet expectations could trigger a correction in company valuations.

"Earnings are slowing overall, so valuations have less room for error this season," analysts at retail stockbroker Morgans note.

Heightened global trade uncertainty from U.S. tariffs, an Australian dollar depreciation, and the potential for fewer interest rate cuts have placed valuations in the spotlight.

While analysts do not anticipate significant earnings misses among blue-chip firms with strong fundamentals, an upside growth surprise is necessary to justify further valuation expansion.

The financial sector, led by Commonwealth Bank's 28% rally last year, is poised for solid earnings growth due to high interest rates, according to Morgans and UBS analysts.

Australian banks are expected to experience a "relatively benign reporting season" with stable margins and robust credit growth, says Citi, but stretched valuations and high expectations may conflict with modest core earnings prospects.

Weakness in resources firms continues to weigh on the overall market. Brokerages anticipate low to mid-double-digit earnings declines in the sector led by BHP Group due to weak demand for Chinese commodities and higher operating costs.

Despite the sector's improving valuation metrics, analysts believe "persistent demand-side concerns and geopolitical risk outweigh the improvement," says Citi's Liz Dinh.

Retailers, another key Australian market component, are expected to post strong first-half results due to increased consumer spending, with potential interest rate cuts in the second half further stimulating demand.

"Rate-sensitive sectors like tech, consumer discretionary, and real estate stocks are likely to attract investor attention in the latter half of the year," says Grady Wulff, a Bell Direct market analyst.