‘Market darlings’ disappoint as earnings expectations reverse
New analysis from State Street Global Advisors (SSGA) has confirmed a “disappointing” February reporting season, with a ‘fortune reversal’ affecting several companies including previous “market darlings”.
SSGA’s Head of Portfolio Management – Asia Pacific, Systematic Equity Active, Bruce Raymond Apted, said the the majority of the largest companies in the S&P ASX300 had struggled to generate positive returns for investors in February, with index earnings expected to decline by one per cent for the next 12 months.
Similarly, earnings expectations for the next 12 and 24 months were negative for BHP, CSL, NAB, Westpac, Goodman and Woodside.
“At the same time as earnings disappoint, we have elevated valuations,” Apted said.
“Technology continued the positive trend from 2024 with earnings estimates revised higher by +1.7% for the next 12 months. Technology ended February with a PE (NTM) of 81.7x which is many times that of any other part of the market.
“Typically, expensive valuations require continued positive earnings momentum. Communication services provided a positive trend change from 2024 with a +1% improvement in earnings expectations during reporting season.
“Other sectors saw either negative or flat earnings revisions.”
The analysis also found that stocks along four key thematics underperformed in February, including higher risk (returned -4.7 per cent on average), stocks with the best performance in the 12 months to February 2025 (returned an average of -4.3 per cent), stocks with higher three to five years growth (returned an average of -4.8 per cent) and stocks with higher short interest (returned an average of -3.0 per cent).
“No short Squeeze in Feb 2025. Reporting seasons have in the past exhibited short squeezes. Sometimes the most shorted stocks see a relief rally as investors cover their shorts or underweight positions when the earnings news isn’t as bad as expected,” Apted said.
“‘Sell the rumor Buy the fact’. On average we did not see a short squeeze in February reporting season with the most shorted companies down -3% underperforming the market.”
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