Reporting season: market surges on flat earnings, is the big rotation on?

The market's perception of corporate Australia is that it is in reasonably rude health, with the ASX200 rising a solid 4 per cent over the past three weeks and scaling heights not seen since May 2008.

With the December half profit-reporting season 60 per cent complete, AMP Capital's latest scorecard has distilled some positive trends among listed companies.

• 57 per cent of results have beaten expectations, against the norm of 45 per cent.

• 68 per cent have seen profits rise from a year ago.

• 54 per cent have seen their share price outperform the market the day they were released.

• 62 per cent have increased their dividends.

Scratch the surface and there is a disconnection between the growth in market value and the growth in corporate earnings.

Citi's Quantitative Research Team has been crunching the all-important earnings per share (EPS) numbers and has found while the majority of companies have performed in line with expectations (56 per cent), more have failed to meet them (25 per cent) than have exceeded them (19 per cent).

In Citi's universe of companies it studies - mainly members of the ASX200 - only 10 per cent of companies reporting so far have had their EPS forecasts upgraded for the 2015 financial year.

Almost twice as many -19 per cent - have had their prospects downgraded, while 64 per cent remain the same.

It has left another big broking house, UBS, feeling rather dubious about the performance as well.

UBS chief strategist David Cassidy agreed results have been "mixed", but on average in line with expectations.

On UBS figures, earnings are set to be flat this financial year.

Although edit out the underperforming resources sector and earnings growth looks like a much more robust 9 per cent, spurred along by a falling Australian dollar and companies continuing to rip costs out of their operations.

But with the market up more than 9 per cent this year, share prices are currently outstripping earnings growth.

"In our view, a flat to down profile for the market for the year is more likely from here," Mr Cassidy told clients recently.

Put more bluntly, UBS thinks the market is over-valued and more likely to fall than keep rising.

UBS has also noted share price movements did not necessarily correlate with reported results as they are dropped.

"As has been the trend in recent reporting seasons, share price volatility around results has vastly exceeded actual EPS revisions."

Much of this is put down to big positions being taken and a frantic scramble to cover some less-than-succesful "short" bets.

Here are some other key themes identified by UBS:

• Cost cutting continues to support earnings: Asciano, Aurizon, Boral, Ansell and Computershare all had cost-out fuelled profit rises.

• Dividend and buyouts have been well supported: Tabcorp, Leighton Holdings, Amcor and Rio Tinto all delivered positive surprises.

• Turn-around stories have emerged: Sims Metal Management and Iluka.

• "Market Darlings" are starting to disappoint as earning don't match their lofty prices: CSL, Carsales and Seek all priced-for-perfection and all slumped on OK results.

The big rotation: Is growth back?

One of world's most respected and astute market strategists, Gerard Minack, said the past month has also seen a big sector rotation in equity markets: yield plays out; growth plays in.

"Several growth-sensitive markets are starting to rise after sharp declines in the second half of last year," Mr Minack wrote to clients.

"One by one the growth dominoes are standing up ... commodities have bounced, bond yields are rising, emerging market equities have out-performed, and cyclical stocks are doing better."

It is a trend noticeable on Wall Street's S&P 500 and is also in play in Australia.

Materials - which includes the big miners like BHP Billiton and Rio Tinto - remains the key growth sector in the ASX200 despite being so badly beaten-down in recent times.

It is up more than 15 per cent this month, compared to a 15 per cent fall last year.

The story is the same in energy - which is dominated by oil and gas plays - and consumer discretionary stocks, other important "growth" sectors where the past month has seen a marked "out-performance" over last year's falls.

On the flip side, "yield" heavy sectors - health, telecommunications and utilities - in the past month have lagged well behind their strong 2014 performances.

However Mr Minack noted the commodity bounce has been patchy.

Iron ore for one is still wallowing near its recent lows despite suffering a similar fall as oil last year.

"Commodity based currencies - Australian and Canadian dollars, the Brazilian real and South African rand - have also not yet responded; at best they have stopped falling," Mr Minack said.

He contended that the movement needed to be put in context and the rotation into growth-sensitive assets has been, so far, small given prior declines.

"Of course, every big move starts as a small move," he said.

"While there are reasons to expect some moderate, but uneven, improvements in growth, that remains for now a forecast."

Mr Minack has picked up on a swing in the balance of global data, with the US starting to disappoint and data everywhere else slightly exceeding forecasts.

But before investors race out and plunge all their "hard-earned" into growth assets, there is a word or two of warning from Mr Minack.

"My long view remains that the forces of disinflation still have the upper hand," he said.

"That, however, doesn't rule out cyclical recoveries.

"However, I doubt that global growth will be strong enough to sustain the broad swing to growth-sensitive assets seen over the past month."

This Week - BHP Billiton

The world's biggest diversified miner would certainly enjoy any rotation into growth stocks by investors.

Its half year result, due on Wednesday, is expected to report an underlying profit of around $US5 billion - or about 37 per cent down on last year's $US8 billion effort.

Nasty falls in two of its main commodities - iron ore is down about 40 per cent year on year, while oil is down 16 per cent - is the root cause.

In its second quarter production report last month, BHP flagged a number of one-off impairment charges which could well knock another $US1 billion off the net profit.

Most broking houses say they are not expecting much in the way of juicy capital management initiatives for investors and the consensus view is for a flat dividend.

Another focus will be information on further cost cutting.

Brokers are suggesting the capex (capital expenditure) spend for next year may have another billion dollars or so sliced off this year's budget and the 2016 capex budget may be cut from around $US13 billion to $US10 billion.

A reduction in spending in the US shale oil fields is an obvious target.

Exploration, potash and iron ore budgets may also feel the pain.

An update on the spinoff of non-core, second-tier assets into the soon to be listed South32 company is expected.

Documentation about the spinoff is expected next month, in preparation for listing in June.

Woolworths

The big retailer had the bar set pretty high after a solid set of results from its fierce competitor, Wesfarmers.

A half-year profit of $1.4 billion is expected on Friday.

Quarterly figures have already shown deflation and another round of heavy fuel discounting is biting.

Wesfamers has shown its strategy across its main retail businesses - Coles, Officeworks, Kmart and Bunnings - has been to grow sales through "price leadership".

That means tighter margins.

As UBS noted after the Wesfamers result, "That Coles growth is slowing somewhat is a function of this [smaller margins] and a reflection of the disruption the hard discounters are causing the market."

It will be interesting to see how Woolworths has been dealing with this.

Investors will also be anxious to see how the troubled Masters home improvement joint venture is going.

Its Wesfarmers rival - Bunnings - is absolutely humming along, with earnings continuing to grow at double digit levels.

Masters, on the other hand, is looking like the proverbial renovation from hell where money keeps being tipped in to a financial black hole and there is no idea when the project will be complete.

Westfield Corporation

This will be the big shopping centre operator's first full-year result in its new restructured, fully off-shore existence.

Given the magnitude of the restructure, comparisons with previous profits are rather academic.

Westfield is tipped to deliver a full-year profit of around $US800 million on Wednesday.

Investors will be hoping for an update on management's plans about where the company will be listed.

The options that have been flagged so far are pretty broad; de-list in Australia and re-list offshore, dual list over two countries or stay put, listed in Australia.

Investors will also be looking for insights in the current pipeline of major projects in London, New York and Milan.

Macro view

It is not a huge week for Australian data.

December quarter wages data, due on Wednesday, should show continued low growth.

Construction data, also due on Wednesday, should reinforce the view that residential building is picking up while mining projects are winding down, while on Thursday business spending figures will probably reinforce that view again.

The main event on the global calendar this week is US Federal Reserve chair Janet Yellen's congressional testimony on Tuesday and Wednesday US time.

It is expected - in rather convoluted terms - to indicate that the Fed is on track to start raising interest rates this year.

Two other chunks of data out later in the week may influence the timing.

A revised GDP growth for the December quarter of 2 per cent or less (due on Friday) and inflation falling below zero (due on Thursday) - both quite possible - could see a rate hike delayed until later in the year.

The four-month extension of the Greek bailout will also exercise traders' minds.

The US saw it as a positive move with Dow Jones closing up 0.9 per cent after a late-session surge on Friday to a new record 18,140 points. The S&P500 was up 0.6 per cent also to a record 2,110 points.

Europe - which may be getting weary of seeing such deals being cut - was less enthusiastic.

The French CAC was down a bit (0.4 per cent) and the German DAX was up a bit [0.6 per cent].

That said, a broad measure of European markets - the Eurostoxx 600 - is trading just off its highest point since 2007.