The past six months has been a rollicking run for Australian equities.

Key points: The ASX200 is just shy of breaking its previous record closing price set back in November 2007

The ASX200 is just shy of breaking its previous record closing price set back in November 2007 Earnings-per-share expectations have been falling steadily over the year, despite rising share prices

Earnings-per-share expectations have been falling steadily over the year, despite rising share prices Given high valuations, any company missing its forecast profit is likely to be sold off sharply

The benchmark ASX200 is up 20 per cent since the start of the year to be just shy of its pre-GFC record.

The broader, all-encompassing All Ordinaries index has done fractionally better and last week just managed to nail a new high.

So does this mean the listed sector is firing on all cylinders, accelerating on souped-up earnings?

We will find out in coming weeks as the August — and largely 2019 full financial year — results season rolls out; but in short the answer is "probably not".

In a valuation sense, the ASX rise has been all about higher prices investors have been prepared to pay.

As Morgan Stanley equity strategist Chis Nichol says, "The earnings pulse has been weak."

"At current stretched valuation levels the stakes are high as we enter results season," Mr Nichol said.

"Based on recent reactions to confession season downgrades, the stock performance for misses has been unforgiving."

The profit warnings have come from across the board; building suppliers like Adelaide Brighton, Challenger in financial services, Costa and Nufarm in agriculture, Blackmores in the consumer sector, Wesfarmers said it may take a $100 million hit on its department stores, banks such as NAB have warned their royal commission remediation costs are higher than expected — the list rolls on.

Earnings forecasts are falling

The reporting season will be a critical test for corporate earnings in Australia, not to mention the price investors are prepared to pay for a "weak earnings pulse".

A year ago aggregate earnings per share (EPS) were expected to grow at almost 9 per cent over the 2019 financial year. It fell to half that by the half-year results in February.

Month by month, that's been chiselled down to the current estimate of a meagre 1.6 per cent EPS growth.

Given mining stocks generally received hefty EPS upgrades, it gives you an idea about the rest of the market, and in particular industrial stocks.

Happily, an EPS growth forecast of around 1 per cent is a pretty low hurdle to clear — and stumbling over low hurdles has been a theme of reporting seasons for the past few years.

Andrew Tang, a strategist from local stockbroker Morgans, has crunched the numbers and found for every earnings upgrade, there have been seven downgrades.

"A spate of downgrades in the face of such a strong rally leaves companies vulnerable to disappointment in our view, particularly as the market turns its attention from the macro to the underlying fundamentals," Mr Tang said.

"Unlike in February, elevated valuations will leave a very narrow margin for error for growth stocks.

"Unless there is a high likelihood of an upgrade, we prefer to err on the side of caution and take profits where we think prices have run ahead of fundamentals."

Dividends still likely to be generous

The big attraction for equities recently — given earnings are waning — has been the fairly generous dividends on offer.

Dividends across the ASX200 are currently yielding on average 4.4 per cent. The yield on Australian bonds is below 2 per cent.

Mr Tang is uneasy about the premium of dividend yields, given earnings expectations generally support dividend expectations.

"Dividend sustainability is a core focus in August in this context," he said.

"We do think the most important large caps will report robust results and dividends, but there will likely be disappointments on EPS and DPS [dividend per share] misses among the smaller or more challenged names.

"That could potentially weigh on an expensive, yield-obsessed market overall."

Where to from here?

But with earnings on the skids, is the ASX heading for the gutter too? Maybe not, according to Macquarie's strategy team.

Macquarie told its clients disappointments were already priced into the market.

"We are in the trough of the cycle, so we are likely to see net earnings downgrades for industrials in the August reporting season," the investment bank said.

"But we do not expect a weak reporting season to cause a correction in Australian stocks, as many investors already expect poor results and central banks are easing."

Having consistently overestimated the strength of earnings for the past couple of years, the market's guess at 2020 again looks heroic.

It varies from broker to broker, but EPS growth of around 8 to 10 per cent is a common forecast for the coming year; for the resources sector it is closer to 20 per cent, largely due to iron ore's bull-run.

Morgan Stanley's Chris Nichol urges caution.

"Our view is that investors should brace for FY2019 disappointment that could temper outlooks and bring 2020 back where it belongs — next to 2021 estimates in low single digit territory," Mr Nichol said.

"The key watch will be whether or not the market looks through any earnings disappointments and instead chooses to wait and see the effects of the dose of medicine provided by the recent rate and tax cuts."

MTS Marquee strategist Hasan Tevfik has a more positive of view of the market.

"We see the market higher in 18 months' time," he said.

"It may need to go down before it goes up, but the bull market is still on, supported by sound profit growth and accommodative policies."

Wall Street hits a new high

While the ASX200 is still inching towards a new high, Wall Street's S&P500 chugs on in its merry way, nonchalantly nailing fresh records — seemingly on a weekly basis.

Friday saw it power well beyond 3,000 points, while the tech-centric Nasdaq also notched a new high, thanks to some solid results, most notably from Google's parent, Alphabet.

US stocks were also helped by better-than-expected GDP data.

The US economy grew at an annual rate of 2.1 per cent in the second quarter; an ideal outcome as it was not so strong as to take this week's expected rate cuts from the Federal Reserve off the table.

Europe bounced back a bit from Thursday's disappointment over the ECB leaving rates on hold. A September cut was always the better-backed bet anyway.

The MSCI measure of global stocks ended the week higher, despite a fairly insipid performance from Asian markets on Friday.

The positive vibe was picked up by traders in ASX futures, leaving the ASX200 poised to lift by just enough to finally beat the record set back November 2007.

Markets on Friday's close: ASX SPI 200 futures +0.3pc at 6,750, ASX 200 (Friday's close) -0.4pc at 6,793

ASX SPI 200 futures +0.3pc at 6,750, ASX 200 (Friday's close) -0.4pc at 6,793 AUD: 69.08 US cents, 62.1 euro cents, 55.8 British pence, 75.1 Japanese yen, $NZ1.04

AUD: 69.08 US cents, 62.1 euro cents, 55.8 British pence, 75.1 Japanese yen, $NZ1.04 US: Dow Jones +0.2pc at 27,192 S&P500 +0.7pc at 3,026 NASDAQ +1.1pc at 8,330

US: Dow Jones +0.2pc at 27,192 S&P500 +0.7pc at 3,026 NASDAQ +1.1pc at 8,330 Europe: FTSE +0.8pc at 7,549 DAX +0.5pc at 12,420 EuroStoxx50 +0.4pc at 3,524

Europe: FTSE +0.8pc at 7,549 DAX +0.5pc at 12,420 EuroStoxx50 +0.4pc at 3,524 Commodities: Brent oil +0.1pc at $US63.46/barrel, Gold +0.3pc at $US1,418/ounce, Iron ore $US117.50/tonne

Inflation and retail still weak

The big number — or should that be, disappointingly small number — for the week will be inflation.

Just as it has for 15 of the last 17 quarters, the latest inflation data, to be released on Wednesday, will undershoot the Reserve Bank's 2-to-3 per cent target band.

Headline inflation is expected to have risen by 0.4 per cent over the second quarter — pushed up by a 10 per cent rise in fuel prices — to be up 1.4 per cent over the year.

The RBA's preferred, and less volatile, measure, trimmed mean CPI, is expected to ease back from the first quarter's 1.6 per cent to just 1.5 per cent — still weaker than what the RBA forecast two months ago.

Nonetheless, as RBA governor Philip Lowe confirmed last week, the bank is sticking to its belief that inflation will eventually rise as unemployment falls and it won't be shifting its goal posts to finally get on target.

Retail sales (Friday) may have picked up a bit in June, but that is in part due to the fact they barely rose in May.

Building approvals (Tuesday) and private sector credit (Wednesday) are also expected to point to a fairly limp economy, although the June data are unlikely to be affected much by the recently legislated tax cuts, or the prospects of lower borrowing costs.

The corporate reporting season grinds into action slowly with Rio Tinto the only blue chip to release results this week.

Rio's underlying half-year profit is forecast to be around $US5.4 billion, or about a billion more than the corresponding period last year, and the dividend may well be a pleasant surprise (if you own the shares).

Overseas the Federal Reserve's rate meeting (Wednesday) will hold global markets' rapt attention this week.

Pencil in a 25 basis point cut, although something bigger is possible. No change would most likely be met with a rather churlish and severe reaction from the markets.

Australia

Date Event Comment Tuesday 30/7/2019 Building approvals Jun: Volatile, but good gauge of future activity. The trend shows a slowdown Wednesday 31/7/2019 Inflation Q2: Key consideration for RBA rates Private sector credit Jun: Still weak growth Company result Fund manager Janus Henderson FY profit forecast to slide to $460m for the Thursday 1/8/2019 Home prices Jul: Were flat in June, but that was a big improvement Trade prices Q2: Booming export prices, led by iron ore Company result Rio Tinto half year; Q2 was a bit disappointing despite high prices. Chance of a dividend increase Friday 2/8/2019 Retail trade Jun: Likely to have picked up, but still a weak 0.3pc over the month Manufacturing survey AiG survey could well show activity is contracting Producer prices Q2: Muted, but rising a bit

Overseas