What should we expect this earnings season?

The local earnings season is upon us, with a plethora of listed companies due to announce results this month.

This will offer some valuable insights into the state of corporate New Zealand and the broader economy, after a mixed bag of indicators in recent months.

There’s been a string of positive signs with business confidence, migration and manufacturing indicators all turning higher.

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Then came the labour force report for the June quarter, which was a stark reminder of the challenges we’re facing.

The unemployment rate increased to 5.6 per cent, worse than expected and the highest since 2015.

However, the labour market tends to be a lagging indicator which tells us more about the past than what’s ahead.

It is often strong heading into a recession, with unemployment only rising once the downturn has become entrenched.

There’s a similar lag coming out of a downturn.

In six of the last eight recessions, the unemployment rate has kept rising as the economy has returned to growth.

That’s because when the recovery first takes hold, businesses first try to get more out of their existing workforce.

They’re cautious about taking on more permanent staff until they see firmer evidence things are getting better.

The outlook commentaries from some of our biggest businesses will hopefully support that view and reflect early signs of improvement.

One positive sign is that we haven’t had much bad news at all through the “confession season” in the leadup to this month.

No news is often good news in the weeks immediately before the company results start rolling in, as listed companies are obliged to inform the market if they become aware they’ll miss market expectations by a wide margin.

Another quietly encouraging factor is the performance of the sharemarket of late.

The NZX 50 index is up more than seven per cent since the end of April, having hit fresh record highs in recent days.

That’s a good run, but it certainly doesn’t mean the market is getting ahead of itself.

Unlike most others around the world, our headline index includes dividend payments as well as share price moves.

When we back dividends out and look at share prices only, the local market is still 13 per cent below its true all-time high from early 2021.

That suggests the bar is still modest, and that there’s room for optimism if results come in solidly.

About two thirds of the domestic sharemarket will report results in the coming weeks, and there’s plenty to watch closely.

The electricity sector is always interesting to monitor, in part because of its size at almost 16 per cent of the NZX 50 index but also because it’s one of the few sectors with multiple players.

All are good businesses, but Mercury could be the pick of the bunch this time around.

I’ll be keeping an eye on some of the more economically sensitive businesses, which might provide some useful insights into broader conditions.

Freightways always manages its operations very well despite the backdrop, while the likes of Fletcher Building, Sky City and Air New Zealand are likely to remain cautious about the future even if they post decent numbers.

There are a few companies where market expectations are low, which offers an opportunity to perform well if they can produce a positive surprise.

Spark is one of those, while the NZX itself has been flying under the radar and should be tracking well given where global markets are at.

There’ll be some notable absences in the coming weeks too.

Our two largest companies, Fisher & Paykel Healthcare and Infratil, have balance dates of 31 March which puts them on a different schedule.

The same goes for Mainfreight, Ryman Healthcare and Turners, although some of this group will hold annual meetings in August, providing an opportunity for trading updates.

It’s been a sluggish first half of the year for the economy, especially during the June quarter.

We’ve seen some bright spots though, with agriculture an obvious one but manufacturing, migration and business confidence also all pointing higher.

That’s been offset by a discouraging uptick in the unemployment rate and a housing market that looks unlikely to pick up anytime soon.

One of the best economic indicators of all is what you’ll hear in the outlook commentaries from management teams, so this reporting season will tell us if some of these early green shoots are real.

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