Company earnings in the 2015-16 reporting season were roughly in line with expectations, but large caps were very "disappointing", says USB Asset Management.
Expectations for the 2016-17 financial year have been downgraded by 1.7 per cent over the course of the recent reporting season, despite 2015-16 results meeting expectations, said UBS.
The downgrade was driven by a lack of earnings growth in the larger stocks, said UBS in a new report.
“The 'very large cap' universe, the top 20 or so stocks by size, is still struggling for earnings growth and on average produced somewhat disappointing results this reporting season,” the report said.
Small caps were also discouraging, though not as bad as their large counterparts, UBS found, while the best results were delivered by mid-cap companies, between 25 and 100 by size.
UBS also noted the Australian market has eased recently, following a solid rally throughout July, bringing the ASX200 price to 5469 basis points.
“Multiples still look demanding in an absolute sense, particularly in industrials ex financials, but the relative appeal of equities against very low interest rates can't be ignored," UBS said.
“Aggregate earnings trends look set to improve in 2016-17 after a weak aggregate 2015-16 due to a revival in commodity prices, though typical stock-specific earnings trends are steadier."
The Australian dollar could be a headwind to foreign currency users if its current “revival” continues, the firm added.
UBS cautioned that single digit total returns are to be expected in 2016-17, as indicated by the high absolute multiples currently seen in the market, though low rates and moderate earnings growth make estimating market performance difficult, UBS said.