As the Australian Securities Exchange (ASX) gears up for a bustling earnings season, Wall Street has shown a robust recovery. The fourth-quarter results season in the United States is nearing its conclusion, yet several key reports are expected this week, particularly from the software industry with companies like AppLovin and Datadog. This sector faces challenges from the burgeoning growth of artificial intelligence, which threatens the sustainability of valuable intellectual property.
High-profile companies such as Coca-Cola, Cisco Systems, and McDonald’s are also set to release their earnings reports. According to AMP’s Head of Investment Strategy, Shane Oliver,
“So far nearly 60% of S&P 500 companies have reported December quarter earnings, with 79.4% beating expectations, above the norm of 76.6%.”
Oliver notes that consensus earnings expectations have risen to 11.8% year-on-year but are likely to reach around 12.5% due to typical beats. The technology sector is leading with earnings up 26% year-on-year, followed by financials and materials, up 12% and 9% respectively.
Challenger’s Strategic Move in the ASX
In a strategic development, investment manager and non-bank lender Challenger has confirmed discussions to acquire ASX-listed Pepper Money. In a statement to the ASX, Challenger mentioned negotiations with Pepper Money’s largest shareholder, the KKR-controlled Pepper Group ANZ. The proposed acquisition, valued at $1.2 billion, would see Pepper Money delisted from the ASX.
The transaction, structured as a scheme of arrangement, would allow Challenger to hold no more than 25% of Pepper Money shares, providing strategic access to fixed income assets to support growth and returns.
ASX Earnings Season Highlights
This week marks a significant uptick in the ASX earnings season, with major companies like CBA, CSL, Computershare, Origin Energy, and AGL releasing first-half results. The banking sector is under the spotlight, with ANZ and NAB presenting their quarterly updates. The focus remains on cost management, as investors were previously dissatisfied with high expenses, leading to a 5% drop in the banking sector following the last reporting season.
UBS analyst John Story highlights earnings per share upgrades across the sector due to higher net interest income and lower cost expectations. Credit charges and impairments are also expected to be lower. Story anticipates CBA to report a first-half cash profit of $5.2 billion, with a potential increase in dividends.
Japan’s Political Shift and Market Impact
The Japanese stock market is poised for further gains following Prime Minister Sanae Takaichi’s landslide electoral victory. Her administration, advocating for “Abenomics” stimulus policies, has driven domestic shares to record highs. The Liberal Democratic Party’s significant win strengthens Takaichi’s mandate, potentially easing legislative processes with a supermajority in parliament.
Societe General notes,
“The Takaichi administration has shown greater awareness of the risks posed by a weak yen and rising bond yields than the opposition parties.”
The “Takaichi trade” is expected to revive, impacting Japanese government bond yields and the yen.
Global Economic Indicators
In Australia, key economic indicators such as the Household Spending Indicator for December and NAB business conditions for January will be released, providing insights into consumer sentiment and spending. Despite strong household spending, consumer confidence remains low, potentially affected by recent interest rate hikes by the Reserve Bank of Australia.
Internationally, the US labor market remains a focal point, with expectations of stable job creation and an unemployment rate holding at 4.4%. The US Consumer Price Index (CPI) for January is also anticipated to rise, influencing potential rate cut decisions.
Wall Street’s recovery last Friday, driven by a 2.5% gain on the Dow, signals investor confidence, despite ongoing challenges in the tech sector. The S&P 500 and Nasdaq also posted significant gains, with chip stocks like Nvidia and Advanced Micro Devices benefiting from increased AI data center investments by Amazon and Alphabet.
European markets mirrored this positive trend, with the Eurostoxx 600 up 0.9%. Futures trading suggests the ASX will open with a 1.2% gain following last week’s decline.
On the commodities front, gold prices have stabilized, trading just below $5,000 per ounce, while US-Iran tensions continue to influence oil markets, with Brent crude up 0.7%.