J.P. Morgan Turns Cautious on Australian Shares After Disappointing Earnings Season
Australian earnings momentum weakens as downgrades outnumber upgrades, raising fresh concerns about the outlook for ASX investors
J.P. Morgan has turned more cautious on Australian shares after reviewing the results from the August reporting season, arguing that the earnings improvement seen earlier in the year has failed to gain lasting momentum. The investment bank's Australian equities chief strategist Jason Steed said expectations following February's reporting season had suggested Australia's prolonged earnings weakness was beginning to ease, but the latest results have largely reversed that optimism.
According to J.P. Morgan, Australia was the only developed market to record negative earnings revisions over the past month, with the ASX 200 down 1.4%, the ASX 50 falling 1.3% and the Industrials index declining 0.7%. Steed said most sectors moved backwards during the reporting season, with healthcare the only area to generate earnings upgrades, although those improvements came from a relatively depressed starting point.
Earnings downgrades outweigh upgrades
The balance between earnings upgrades and downgrades also deteriorated throughout the reporting season. J.P. Morgan found that only 22% of companies produced earnings upgrades, falling below the long-term average, while 43% experienced downgrades.
There were still some companies delivering stronger-than-expected earnings expectations. Ramsay Healthcare received a 6% upgrade, Super Retail Group was upgraded by 7%, Virgin Australia by 12% and Mineral Resources by 14%.
However, several major companies faced meaningful downward revisions. JB Hi-Fi was downgraded by 5%, Endeavour Group by 10%, Seek by 11% and Life360 by 14%, highlighting the uneven nature of the current earnings environment.
Mid-cap companies provide some support
Despite the weaker overall outlook, J.P. Morgan sees a brighter earnings trajectory among Australia's mid-cap companies. Steed estimates the group could deliver 11.1% compound annual earnings growth over the next three years.
That compares with a much more modest 4.9% expected growth for ASX 20 companies, suggesting that Australia's largest stocks may provide less earnings momentum than their smaller counterparts.
The contrast is important for investors because the broader market's earnings outlook is increasingly dependent on where growth is concentrated. While the largest companies remain a major part of the Australian sharemarket, stronger growth among mid-caps could provide some support if those forecasts are achieved.
Dividends remain a bright spot
One area that remained relatively resilient during the reporting season was shareholder income. J.P. Morgan noted that Australian companies continued to show reluctance to reduce dividends despite softer earnings expectations.
The bank attributed this partly to the income-focused nature of the Australian market and the role of franking credits. Dividend-per-share upgrades were above their historical average, while dividend downgrades remained below average.
What it means for investors
For investors, J.P. Morgan's assessment suggests the earnings environment across Australian equities may be less supportive than earlier expectations indicated. With downgrades significantly outnumbering upgrades and only healthcare producing broad earnings improvements, the market could face greater pressure if earnings expectations continue to weaken.
At the same time, the stronger projected growth among mid-cap companies and continued dividend support offer areas of resilience. The key question for investors will be whether earnings momentum can recover or whether the August reporting season marks a return to a more challenging period for Australian equities.
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