If something is going to stop the sharemarket reaching 6000 points by Christmas it won't be this reporting season.
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Not that it'll be much help, mind you. But there are worthier things to worry about such as a slowing economy in China or the potential for Wall Street to still get rattled by a modest rate rise in a few months despite the longest warning ever.
The profit results for the past financial year won't be as bad as some high-profile disappointments would have you believe.
There may even be some pleasant surprises.
And analysts expect this financial year to be better again.
Although headline grabbers such as Flight Centre, Seek and Woolworths have downgraded their profit forecasts, they're likely to be the exceptions rather than the rule.
It's a similar story in the US, which is just as well since Wall Street's reaction to profit results reverberates through other markets, not least our own.
But so far so good. More than half of companies that have reported posted better-than-expected sales and profits, although analysts are still forecasting a slight overall drop.
And Apple offers a salutary warning about what really counts in a profit statement.
Although its profit surged another 39 per cent, the share price dropped 7 per cent in a day, pulling our market down as well, because its comments about the current quarter's trading weren't as upbeat as analysts were.
Besides, just what they might be expecting is a moveable feast. Under the ASX's continuous disclosure rules, big profit shocks one way or another shouldn't happen in the reporting season because of the obligation to tell all earlier.
The trouble is that also means the market has long since taken analysts' forecasts into account and moved on.
Overall we can expect 8.5 per cent earnings growth among industrials "which would be the fourth year in a row of improvement", AMP chief economist Shane Oliver says.
In fact take out the banks and the non-mining sector is likely to have posted an 11 per cent gain in profits overall in 2014-15, the best result since the GFC.
Fund manager UBS is even predicting 13 per cent.
Cash flow boost
One criticism you can expect will be that once again companies are making do with less rather than selling more.
The worst of the downsizing may be over but record low wage growth, and a reluctance to invest, is helping cash flow no end.
Still, as Don Williams, chief investment officer of Platypus Asset Management, says "topline growth and cost savings are both important. They're money in the door."
Take out resources stocks and this year's results "will be better than last year's because most quality industrial companies have [cut costs]", Williams says.
Even so the market "will be bereft of earnings growth", he warns.
The best results are likely to be found in the healthcare, IT, telco and listed property trusts, Elio D'Amato, chief executive of research house and fund manager Lincoln, says.
If a welcome surprise last year was the turnaround in the big resource stock profits, which grew 26 per cent despite commodity prices falling faster than the dollar, that won't be the case this year.
The collapse of iron ore prices especially will lead to a 30 per cent slump in the big resources stocks, Oliver warns.
But the market is so down on them that CMC Markets' chief market strategist Michael McCarthy says he "expects some positive surprises in mining. They won't be rosy but not as bad as is being extrapolated," he says.
For other stocks it's almost a lucky double dip – improving economic growth and the end of the mining boom that had squeezed everything else.
Did I say improving economic growth? You wouldn't know it the way the government is whingeing about its budget revenues and the Reserve Bank fusses over investment by business being too low, but economic growth has picked up in each of the past three quarters.
In the March quarter it was 0.9 per cent which, in the American way of reporting statistics, would be an annualised 3.6 per cent, the best in years.
Since then indications are that this has kept up, judging by surveys of confidence, jobs growth and advertised vacancies.
A lower-than-expected unemployment rate hovering at about 6 per cent, despite an expanding workforce, suggests companies in the labour-intensive services sector, especially those riding the housing boom such as retailing (also benefiting from a shift away from online buying as the dollar drops) and suppliers including Boral or Stockland as well as healthcare will do well.
The oldest and biggest listed investment company, Australian Foundation Investment Company (AFIC), which reported a 15.1 per cent profit rise for 2014-15, anticipates "modest profit rises but nothing spectacular" this reporting season,chief executive Ross Barker says.
It seems healthcare stocks especially appeal to fund managers.
"They deliver pretty decent growth year in and year out. They also have offshore earnings," Williams says.
AFIC is also increasing its healthcare holdings whenever there's a price dip.
But as Primary Health Care's disappointing result showed, any stocks in the stronger sectors not performing won't be tolerated by the market.
It's no secret the resources boom savaged manufacturing and retailing by driving up the dollar. Or "messed the whole market up" as Oliver puts it.
But as the boom deflates the dollar is dropping back, and along with more falls in interest rates, the environment is far more benign for non-mining stocks even if they might be bouncing back from a low base.
Since it was towards the end of the financial year that the dollar dropped the most, its benefits won't fully show up in this reporting season.
Dollar dazzlers
Stocks with US dollar earnings such as Amcor, BlueScope Steel, Cochlear, ComputerShare, CSL, ResMed and Sonic Healthcare will be the big winners.
"The weaker dollar is a tailwind for those leveraged to the improving US economy," D'Amato says.
Buoyed by record low rates, and foreign interest thanks to the weaker dollar, real estate investment trusts are also faring well.
"It's a very different sector from what it was with a lot of value although much of that has been taken up [in price increases] so the yields aren't as good. But they have quality balance sheets and assets," D'Amato says.
While the market is going into the reporting season fairly priced, the problem will be what, if anything, is said about this financial year.
Some boards like to wait a couple of months for the annual meeting when they have a better handle on what's happening – not hard when almost half the year will be over by then.
Anyway the reporting season is as much about dividends as profits.
The sharemarket returned 6.9 per cent in the year to June 30 "of which about 80 per cent was from dividends", Williams says.
Oddly enough, the fastest-growing dividends have been coming from resources stocks. Oliver says those dividends grew 12 per cent last year compared with 8 per cent for the rest of the market.
How can they keep this up when export prices have collapsed?
Because they're winding down their huge capital spending programs which is allowing them to lift their relatively low payout ratios – that is the proportion of profits earmarked for dividends which in BHP Billiton's case is projected to rise each year.
With its dividends rising and share price falling the yield – that is the return taking into account what you had to pay to get it – on BHP shares is almost as much as some of the banks. In fact the way their respective share prices are going it might even match them this year.
Dividend hunters need to pay critical attention to payout ratios. For example, with some of the smaller iron ore stocks it's more than 100 per cent, so they're paying more in dividends than they earn, which is not sustainable.
And beware the dividend trap. An unusually high yield, which in this market is anything over 6 per cent, says more about the state of the share price than the dividend.
For example, MMA Offshore is yielding almost 20 per cent, the result of its value crashing 70 per cent. And it's been cutting its dividends.
A less obvious dividend trap was Rio Tinto. Its 8 per cent yield almost looks sustainable yet belies a 20 per cent drop in its share price in the past year.
On the other hand the banks keep on keeping on.
The only threat to their dividends would be rising bad debts. While these are as low as they're likely to ever get, a reversal seems some way off. Despite sluggish economic growth, unemployment appears to have peaked and rates remain ridiculously low.
But don't expect wonders from the share price.
"We think bank earnings will grow only 2 to 3 per cent and suspect they might ramp up their dividend reinvestment schemes," Oliver says.
It's hard to think of a downside to low inflation, but the utilities may have found it. As the June quarter consumer price index revealed, electricity prices along with water and sewerage charges fell, which can't be good for profits.
And don't expect any wonders from your newly minted Medibank Private scrip. Although the world's richest investor, Warren Buffett, has made his first foray into the Australian market with a stake in IAG the insurance sector is having to cope with much stiffer competition, CommSec analyst Juliana Roadley says.
"The churn level has increased. This is the length of time people hold on to a policy. There's a greater change from one product to the next one. It costs more to acquire customers and they face very tight competition," Roadley says.
And what about that elusive 6000 target?
"Price-earnings ratios are at relatively high levels but there are two saving graces. If it's one thing that can sustain low company growth it's inflation. And dividend yields are a natural floor for the market. Whenever the banks sell off people flood in to get the better yield," D'Amato says.
ACTION PLAN
What to watch for this reporting season:
- Profit growth of at least 8 per cent backed by some growth in sales.
- Whether the dividend payout ratio has increased.
- Any comments about trading since June 30.
- Healthcare stocks are likely to be the stars.
- Property trusts that are buoyed by low rates and the weaker dollar.
