Five things we learnt this earnings season

It's a wrap. Many companies have reported their first-half earnings for the 2019 financial year and given us some clues as to what to look out for over the second half. For us, there were five key takes outs from the reporting season, which we’ve summarised below.

1. Results were better than expected

Despite forecasts of doom and gloom the results were actually, on the whole, above market expectations.

There are two ways to define a surprise result – either by what the earnings estimates of analysts do after the result or by the share price movement, which I find a more insightful gauge of what the market really thought of a result.

If we look at the number of result surprises, defined by the share price movement on the day of announcement, we see a skew to positive surprises overall.

We define a surprise as outperforming the market by more than two per cent in a day, and by this measure, 34 per cent of companies surprised on the upside, slightly more than surprised on the downside.

Even more prominent were those stocks whose share prices outperformed the market by 10 per cent, on this measure eight per cent of companies surprised the market on the upside versus the four per cent which surprised on the downside.

Share price responses tell us there were more beats than misses

Despite earnings expectations seeing more downgrades than upgrades

2. Capital management was rewarded

While investors didn’t receive the full windfalls we had predicted fuelled by potential legislative changes to franking credits, capital management was still highly prominent in company results. Total capital management for the half will look to total $15 billion. Payout ratios beat expectations and currently sit above the long-term average, particularly driven by the resources sector.

Those stocks that delivered on capital management, be that through special dividends or buybacks, were rewarded with strong share price moves as in the current low-growth environment the market is rewarding income as an alternative source of returns in 2019.

3. Defensives struggled

As we approach the end of the cycle many managers have started rotating to more defensive stocks in their portfolio so in the context of expectations, hopes were high but the defensives failed to deliver.

Consumer staples was the only sector to post a negative return, which was driven by sluggish food retail sales, despite the release of positive food inflation in the lead up to the results period.

In other defensive sectors like gaming and healthcare we saw the emergence of cost pressures in the quest for growth.

All up, cyclical stocks continue to deliver stronger growth than defensives and the growth/value divide remains elevated.

4. The wealth effect hit
One of the things we have been most mindful of is the negative wealth effect of falling housing prices. Most of us went into reporting season expecting this to play out in the discretionary retail sector and while their outlook statements were cautious, their results were actually commendable.

However, as you would have seen in our recent small cap reporting season wrap, the housing slowdown has hit the construction sector, and big-ticket items such as automotive, which had flow on effects to companies involved in car leasing.

5. Financial year 2019 is a resources story
Overall, for the first half of the 2019 financial year the market posted just one per cent earnings growth – the lowest level in two years.

However, earnings expectations for the full year actually rose over the month to around 3.5 per cent, driven by upgrades to resources, particularly those with iron ore exposures, with negative revisions to industrials, which were down three per cent driven by insurance, defensives and telecommunication.

As a consequence, our forecasts for the full financial year have resource companies growing in the low-to-mid teens and the rest of the market contracting.

Finally, it's not all about reporting season
The ASX 200 accumulation index finished February back at almost all-time highs, positing a solid 5.98 per cent return over the February reporting season.

While the half-year results were one factor driving the market, it was not the only one, with clarity on the outcomes from the Financial Services Royal Commission, the increased probability of an interest rate cut by the Reserve Bank of Australia, the thawing of the US/China trade war and the prospect of Chinese stimulus all fuelling positive investor sentiment.