FCR sees 2027 earnings rebound after 2026 dip

First Capital Research (FCR) maintains its 2026 corporate earnings growth forecast at a softer 8.2 percent, down from 25.5 percent last year, citing persistent macroeconomic headwinds.

A robust double-digit recovery of 14.0 percent is projected for 2027, supported by the normalising energy costs and an anticipated 50-basis-point policy rate cut. Sri Lankan corporate earnings are projected to enter a period of moderation in 2026, as the lagged effects of recent geopolitical shocks filter through the domestic economy, before staging a notable recovery in 2027, according to FCR. 

In its latest Equity Strategy report, the research house highlighted that while the market sentiment has seen a temporary reprieve, following the easing global tensions, the domestic corporate performance would face visible pressures over the coming quarters. 

The high input costs, potential electricity tariff revisions, currency volatility and elevated financing costs are expected to tighten the squeeze on corporate margins, while the eroding consumer purchasing power constrains the topline revenue growth.  FCR noted that “the lagged effects of the earlier geopolitical shock weigh on the economy in 2026E”, pointing out that “elevated input costs, potential electricity tariff revisions, LKR depreciation and higher financing costs are expected to pressure corporate margins”. 

Reflecting this challenging landscape, corporate earnings have already registered a downward quarterly momentum, declining by 11.4 percent year-on-year in the first quarter of 2026. This contraction marks the third consecutive quarter of falling corporate profitability, with the food, beverage and tobacco sector emerging as the largest drag on aggregate market returns. 

FCR warns that further quarterly weakness lies ahead for the remainder of the year, as the transmission of higher utility rates and exchange rate pass-through effects continue to unfold. 

Consequently, following a robust market earnings growth of 25.5 percent recorded for the full year of 2025, FCR has maintained its aggregate 2026 earnings growth forecast at a muted 8.2 percent.  This deceleration is closely aligned with an expected moderation in national GDP growth to a range of 3.0 percent to 4.0 percent for the full year, down from the 5.1 percent expansion witnessed in the first quarter of 2026. 

The industrial operating costs have already escalated, driven by successive electricity tariff hikes, including an average 10 percent increase in the second quarter and an additional 18 percent spike for the high-consumption users. 

Furthermore, a weakening local currency—which saw the rupee deflate significantly against the US dollar, following the external shocks earlier in the year—has further inflated the cost of critical intermediate imports for the domestic manufacturers.

However, a stronger macroeconomic turnaround is anticipated for 2027, with the corporate earnings growth projected to accelerate back to 14.0 percent. FCR notes that the bulk of the economic fallout, stemming from the recent Middle East tensions, will likely be absorbed within this year, paving the way for a healthier operating environment next year. This turnaround is expected to be underpinned by the normalising global energy prices and increased government spending to revive the domestic demand. 

Additionally, an anticipated 50-basis-point policy rate cut by the Central Bank of Sri Lanka in early 2027 is expected to stimulate credit demand and lower corporate financing costs. 

On a sector-wise basis, the banking sector is expected to remain highly resilient, despite a recent 100-basis-point policy rate hike and a projected moderation in credit growth to 15.0 percent. The sector earnings will be supported by a gradual expansion in net interest margins, as the lending rates reprice faster than the funding costs, alongside disciplined credit management to contain the asset quality pressures. 

Similarly, diversified financials are poised to weather the soft credit environment through robust structural demand for leasing and gold-backed lending, paired with prudent underwriting and asset-liability management.

For the consumer-facing and external sectors, a mixed but resilient outlook is unfolding. The near-term outlook for the tourism sector has strengthened ahead of its peak season, due to the tentative easing of geopolitical conflicts, with the city hotels expected to show strong resilience driven by business travel and source market diversification. Cont. on page 11