Australia’s reporting season is set to commence next week, with analysts bracing for a potentially volatile period marked by significant share price movements despite modest earnings surprises. While the market anticipates a 13 per cent uplift in total earnings, largely driven by stronger commodity prices boosting the resources sector, growth across other sectors is expected to be inconsistent. Morgan Stanley strategist Chris Nicol warns that despite market expectations for robust earnings growth in fiscal years 2027 and 2028, top-down models suggest mid-single-digit figures are more likely as the Australian economy faces headwinds from rising interest rates and inflation.
Goldman Sachs’ Matthew Ross highlights that a combination of a slowing domestic economy and escalating inflationary pressures, including geopolitical impacts on energy, rising wages, and technology costs, will shift investor focus heavily towards cost-cutting measures. Corporate Australia has notably struggled to contain employee cost growth, with wages increasing by 8 per cent in the first half of the financial year against a 5 per cent rise in sales. This trend continues from recent years, exacerbated by a 4.75 per cent minimum wage increase, with significant pay pressures expected in healthcare, mining, retail, and banking.
Beyond wages, companies face higher borrowing costs due to RBA rate rises, impacting small-cap firms disproportionately, and a global surge in technology expenses, particularly for software licenses, cloud computing, and artificial intelligence models. While AI holds promise for efficiency, evidence of bottom-line productivity improvements remains limited. Ross’s analysis identifies 16 companies across various sectors, including industrials, retail, healthcare, technology, and financial services, where labour costs are high and profit margins are below historical averages, suggesting they will be closely scrutinised for cost containment strategies in the coming weeks.
