The S&P/ASX 200 has fallen for six straight days and is now in the red for calendar 2026, as dread about more profit warnings spreads across the market.
It takes plenty of intestinal fortitude to manage money at the best of times. But right now, Australian fund managers need all the grit they can muster.
Three-quarters of funds failed to beat their benchmark last year. And in the first three months of the year, the combination of artificial intelligence disruption, war, sudden shifts in precious metals markets and nasty conditions in small-cap stocks has left hedge funds and stock pickers fighting through a sea of red ink.
Now, they’re staring into a new problem: the “confession season” that kicks off each year in the first week of May at Macquarie’s annual Australian investment conference. Almost 70 companies are due to present at this year’s event, and most will provide some sort of trading update. If the past few weeks are anything to go by, the confessions are unlikely to contain much good news.
Richard Schellbach, the local market strategist at UBS, has tallied up 21 companies that have released trading updates referencing the war in Iran since the end of February. They include the airlines, NAB and Westpac, engineering giant Worley, waste management company Cleanaway, toll road operator Transurban, leisure operator EVT, and Cochlear, which cited disruption from the Middle East in a nasty profit downgrade that sent the stock slumping 40 per cent in a day.
Is this the start of the sort of major earnings downgrade cycle that we’ve seen during previous global shocks? During the global financial crisis, for example, earnings for cyclical Australian industrial stocks fell 52 per cent, share prices plunged 70 per cent peak-to-trough, and valuations fell 51 per cent over a brutal 18-month period. During the six-month downgrade cycle during the pandemic, industrials were hit with profit downgrades of 52 per cent, share price falls of 38 per cent and valuation declines of 29 per cent.
It’s too early to say what we’ll get this time around, but Schellbach argues that what is clear is that the earnings upgrade cycle of the early months of the year is over, and there are “signs that broad-based earnings downgrades will dominate headlines over coming weeks”.
Local investors appear to know it, too.
While Wall Street ground its way to a record high on Monday night thanks to more AI optimism and resilient confidence in America’s energy self-sufficiency, the S&P/ASX 200 slipped for the sixth straight session on Tuesday, falling 0.6 per cent.
Since last Monday, Australia’s benchmark equity market index is down 2.7 per cent. Perhaps more notably, the ASX 200 is now down year-to-date. There’s a hell of a lot of water to go under the bridge, but there’s also the growing prospect that 2026 becomes a lost year for Australian investors, while Wall Street powers along.
AI trade is back on
The weakness in Australia’s equity market isn’t all about the domestic picture. Wilson Asset Management portfolio manager Matt Haupt says the shift in global markets in the past few weeks has changed the direction of flows. Where Australia was seen as a haven trade in the early weeks of the Iran conflict, the momentum in the AI trade has sucked money out of the ASX and into Wall Street and Asian markets like Korea and Taiwan, where the main equity indices have surged 26 per cent and 22 per cent in the past 30 days.
“As the world’s gone risk-on again, everyone’s gone back to the same old trades they had on before the war,” Haupt says.
Clearly, these flows matter. But what’s more important to those local fund managers who focus on the ASX is the question of how big the local profit downgrade sector might turn out to be.
Although Australia initially joined in the global rally that swept through equity markets in late March as US President Donald Trump softened his tone on Iran and put a ceasefire in place – the ASX 200 bounced 7.3 per cent off its wartime low on March 23 – Schellbach says he was always a bit baffled that investors appeared to be ignoring the rapidly softening data coming out of the domestic economy, including surging local fuel prices, higher inflation, the threat of lower GDP growth and weaker readings on business and consumer confidence.
Investors are now clearly nervous about where the next downgrade might come from. Schellbach notes there are 25 companies that have suffered share price falls of 10 per cent or more since the conflict in Iran began at the end of February, but where earnings estimates have not materially shifted.
These include online retailer Temple & Webster; four-wheel-drive accessories giant ARB; Kiwi building materials group Fletcher Building; retailers Harvey Norman, Nick Scali, Super Retail Group, Endeavour Group, Flight Centre and Domino’s Pizza; industrial stocks Amcor, Ansell, Orica, SGH, Brambles, Reece, ALS and Downer; property groups Stockland, Mirvac, Ingenia and PEXA; Auckland Airport; gaming machine maker Light & Wonder; mining services company Monadelphous; and online classifieds group Seek.
At least 10 of those companies will present at the Macquarie conference, so by the middle of next week, we’ll get a better sense of how their earnings are holding up. But Schellbach says the downgrades we’ve seen suggest that those share price falls might not capture the bad news that’s coming.
Those 21 companies that have issued war-related downgrades had seen their share prices fall, on average, by 8 per cent ahead of their trading updates. But the stocks subsequently fell by an average of 4 per cent on the day of the downgrade.
“This suggests that not all the bad news was in the price, and supports our general view that we may be still too early in this downgrade cycle to confidently look through and buy into bad earnings news,” Schellbach says.
Domestic resilience
Julia Weng, who covers industrials, financials and healthcare at Paradice Investment Management, is sanguine about the possibility that next week’s confession season will turn ugly.
While she’s cautious around sectors such as retail and construction, which are exposed to the direct impact of rising fuel prices and the second-order hit to consumer and business confidence, Weng says it is impossible to ignore the underlying strength of the jobs market, which has underpinned robust demand. If anything, Weng says, a slowdown that takes some of the heat out of the economy may be a good thing.
“Given how strong the Aussie market was headed into this conflict, I think it will be well-managed. I’m not expecting a huge disaster here,” she told an investor briefing held by the Future Generation listed investment companies in Melbourne on Tuesday.
Weng also noted that plumbing supplies group Reliance Worldwide maintained its guidance on Tuesday, and said it is managing higher resin, logistics and energy costs by pushing through price increases.
Reliance shares, which are down more than 24 per cent in the past six months, rallied 4 per cent on Tuesday. But a story like that might have a sting in the tail. Companies can pass through higher prices because the Australian economy is running hot. Those price rises will ultimately put more upward pressure on inflation, and create the risk that the Reserve Bank of Australia may need to lift interest rates to prevent inflation expectations becoming unanchored. How much damage might that do?
Wilson Asset Management chairman Geoff Wilson says the firm’s house view is that anything more than one rate rise may spark the type of slowdown that the RBA does not want to see.
“Are we going to have a recession?” Wilson asks. “Let’s hope we are not going anywhere near it.”
Wednesday’s inflation data will be telling for local investors.
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