Stronger earnings, eased inflation bolster market fundamentals: Capital Trust

• Market fundamentals at strongest since 2022 despite recent selloff

The easing inflation and lower finance costs supported a recovery in consumer spending, particularly in the latter part of last year, helping the listed companies post higher annual earnings, Capital Trust Research said.

In its customary quarterly earnings and performance update for the October-December quarter of 2024, the research house noted, “The December quarter earnings get a tailwind from higher topline, cooler inflation and lower interest rates.”

The report reassured the investors about the strength of stocks, which have taken a hit through most of February and into March, despite no clear reason for the decline.

The market fundamentals have not been this strong since the 2022 market meltdown, triggered by the jumbo rate hike in April 2022, in response to the foreign exchange shortage that ultimately led to a full-blown political crisis.

Despite these stronger fundamentals, the All Share Price Index erased nearly all its gains for the year at the start of last week, before recovering slightly to close with a year-to-date gain of just 1.07 percent. Meanwhile, the S&P SL20 index of large-cap stocks is down 1.11 percent for the year.

The market is currently trading at 8.70 times the trailing 12 months’ earnings. While it has rerated, following the relatively stronger December quarter earnings, it remains well below its 10-year average of around 13 times and the pre-crisis peak of approximately 15 times in 2022.

Capital Trust Research highlighted that the toplines of listed companies grew by 8.4 percent in the December quarter compared to the previous year and by 5.2 percent on a quarter-on-quarter (QoQ) basis, supported by the broad-based economic expansion.

Meanwhile, the cumulative bottom-line earnings surged by 25.1 percent in the October-December quarter to Rs.226.71 billion from the same period in 2023, though the QoQ growth remained nearly flat.Analysts attributed the strong year-on-year earnings growth to the banks’ one-off significant gains from the provision reversals related to the International Sovereign Bonds (ISBs) as well as lower finance costs across other entities.“The banks’ one-off, significant provision reversal related to the ISB restructuring boosted the 4Q earnings,” Capital Trust Research said.“However, some sectors faced pressure from margin compression and rising overhead costs, which were partially offset by lower finance costs, due to the reduced interest rate environment. The QoQ earnings growth was limited, primarily due to the absence of September’s exceptional gains and a decline in profits from a few entities, which notably impacted the earnings in the September 2024 quarter,” they added.The report emphasised that the market fundamentals remain strong and suggested further upside potential for stocks this year.If the recent pullback was merely a correction to shake off the perceived froth in the market, some analysts believe the current levels present a buying opportunity—particularly for the investors who missed out on the post-presidential election rally. Equities are expected to benefit from the continued earnings growth, supported by the ongoing economic recovery and rising consumer and business spending.