Our market is struggling for direction with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index giving back some of this week's gains as investors search for new reasons to bid the market higher.
Optimism around the de-escalation in US-China trade tensions and a potential Brexit deal that will see the UK leave the European Union on congenial terms weren't enough to draw buyers out into the open on Thursday.
If you are feeling nervous about the market, you aren't alone. It feels like a lot of good news is priced into shares and not much of the risks.
Market looking expensive overall
The strategists at Macquarie Group Ltd (ASX: MQG) is urging investors to stay defensive as it highlights its key buy and sell ideas.
"MRE analysts have continued to lower FY20 EPSg [earnings per share growth] since the last reporting season. EPSg forecasts have been reduced 375bps [basis points] for Resources and 44bps for Industrials," said the broker.
"EPS cuts are not what the market needs when the ASX Industrials PE is 18.4x, or 2.3 standard deviations above average and higher than the S&P 500."
Least favoured blue-chips
What's also worrying is that many share prices have not fallen enough to reflect the weaker profit outlook. Macquarie noted that nearly half of ASX 200 shares have reported earnings cuts that were masked by a rise in their price-earnings (P/E) ratio.
"We looked at the contribution of EPS and PE changes to 2019 returns for individual ASX 200 stocks," said Macquarie.
"We think stocks where YTD [year-to-date] PE expansion at least partly masks a decline in EPS are at greater risk of an earnings-driven sell-off, especially when recent EPS revisions are negative."
The stocks in this category include our largest mortgage lender Commonwealth Bank of Australia (ASX: CBA), mall operator Scentre Group (ASX: SCG), insurer Insurance Australia Group Ltd (ASX: IAG) and share registry services group Computershare Limited (ASX: CPU) – just to name a few.
Best buy ideas
On the flipside, ASX shares that investors should be putting on their buy list are those that are best placed to increase their earnings in the year ahead.
"We think stocks with rising earnings in 2019 YTD and net earnings upgrades in the last 60 days could be rewarded by investors if they continue to grow earnings," explained Macquarie.
The stocks on this list include industrials property company Goodman Group (ASX: GMG), diversified engineering and property developer Lendlease Group (ASX: LLC), gaming machine maker Aristocrat Leisure Limited (ASX: ALL), building materials company James Hardie Industries plc (ASX: JHX), accounting software group Xero Limited (ASX: XRO) and energy company Santos Ltd (ASX: STO).
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