• Resources sector still booming in 2010
  • Falling margins and global uncertainty set to hit bank earnings

Average profit growth could be as high as 20 per cent across the sectors for the 30 June reporting season on the back of improving local economic conditions, according to David Taylor, Market Analyst at CMC Markets.

With the reporting season closely watched by many, Mr Taylor predicted company outlook statements would be positive. However, markets would remain volatile in the short term and each sector would face difficult challenges.

Resources to lead the way as banks struggle

With expected improvement in company earnings, price/earnings ratios should move closer to historical averages of 14 times earnings, up from recent levels of around 12 times.

"Although investor confidence is still shaky, I expect earnings in line with historical levels. Each sector still faces unique earnings headwinds but I believe these factors have been built into company valuations," Mr Taylor said.

According to Mr Taylor, the resources sector is looking healthy with the government reversing key areas of the resources rent tax. There is however a slim possibility of a dramatic slowdown if the property market collapses in China, and shocks from Europe's debt crisis continue.

"Valuations in the resources sector are being shaped by different pressures locally and globally. One indicator to look for will be the volume of new projects in the pipeline which sends strong signals to the market on the outlook for demand," Mr Taylor noted.

Banks will also be in focus as investors look at impairment charges and dividend policies. Funding costs from international wholesale markets should be watched closely as competition increases.

"There is a possibility of non-bank lenders beginning to re-emerge, potentially causing margins to fall due to competitive pressures. With international macroeconomic issues adding pressure on funding costs and murmurs of a housing bubble, the signals point to the potential for earnings disappoints in the banking sector," he said.

Economic data from the US and China will also affect energy stocks which are leveraged to the oil price. Chinese demand for oil is encouraging, but the US is looking less robust.

"Economic conditions in China and the US will significantly influence energy stocks. Two key indicators to look out for are the jobless rate and housing data. Meanwhile major project opportunities in Queensland and NSW may provide solid earnings for the sector," Mr Taylor added.

With energy and fuel prices rising, higher interest rates in the medium term and uncertainty prevailing among consumers, the consumer discretionary sector does not look promising.

"Other sectors to keep an eye out for are media, transport and industrials. These are all cyclical sectors and will be impacted by a downturn in global growth,' Mr Taylor added.

Confession season surprises, few and far between

The 'confession season' - when companies communicate potential disappointments to the market - has passed without too many surprises.

Four companies that did manage to spook the market though were Macquarie Group, Virgin Blue, IAG and Elders. Elders was one of the more recent companies to deliver a profit warning that saw the stock tumble over 40 per cent on the day. Many of these companies blame one-off events and try to reassure investors about the outlook.

Mr Taylor said the crucial factor here is investor expectations. If a company produces a res

ult that meets expectations, the share price will rarely move. If it falls short of expectations, the stock will retreat. If it beats consensus estimates, the stock will rally.

"Regardless of company earnings, exceeding expectations indicates future earnings need to be factored in. This puts upwards pressure on the share price as a positive indication of earnings growth moving forward," he said.

ASX 200 to reach 4800 by year end

The S&P/ASX200 should close the year around the 4800 level provided reporting season results are as predicted. Market tailwinds such as large cash reserves, low company valuations and low global interest rates (making equities relatively more attractive) should bode well for Australian equities.

"There are still global and domestic uncertainties and the market needs clearer signals on forward earnings to increase confidence. Once confidence builds, volumes will return," Mr Taylor concluded.