The ASX stocks set to cash in as artificial intelligence drives new earnings boom

The artificial intelligence boom is feeding through to Australian corporate profits faster than expected, with analysts upgrading earnings forecasts before the August reporting season and tipping stronger returns for investors.

Macquarie thinks the cost-saving and productivity benefits from AI will help corporates grow earnings at an average rate of 11.1 per cent over the 12 months to June 30, 2027.

“It might not feel like it, but AI capex is driving an earnings boom. Earnings per forecasts are rising at a 15 per cent clip. That’s half the US, but still good,” said Macquarie.

The upgrades come after a subdued financial year for the local sharemarket. The S&P/ASX 200 returned just 2.8 per cent before dividends in the 12 months to June 30, as investors worried about sticky inflation, higher interest rates and the fallout from Iran war.

The bank’s research team favours owning companies that are better positioned for higher-for-longer interest rates after the Iran war stoked inflation over the first half of the year.

The bank names insurers such as QBE, Suncorp, and Medibank as potential winners. It also warns to avoid the big banks given risks around house price falls, rising interest rates, budget tax changes, and high valuations.

Among different sectors, resources is forecast to deliver the strongest profit growth this financial year at 17.3 per cent, with banks at 8.3 per cent.

Tech and retail could rebound

Other investors argue beaten-down technology and retail stocks could produce strong returns if the market becomes more confident the Reserve Bank has finished lifting rates from its current 4.35 per cent rate.

“Every fundamental analyst should tell you it’s all about valuation, rather than just owning a sector,” said Richard Hemming the founder of the Under The Radar stock report. “The AI transition is at the early stages and a lot of software stocks have fallen hard on the basis their customers will desert them in favour of AI, but the key words are ‘mission critical’ if your software is really valuable I don’t think it will be replaced.”

Hemming tips ASX-listed enterprise software sellers Hansen Technologies and Gentrack as in for a good 12 months or more on the assumption investors conclude AI will not disrupt their business models.

He also pointed to Catapult Sports, which sells performance-tracking technology to professional sporting teams, as a business still on a strong growth path.

“Catapult Sports is not mission critical to sports teams, but you wouldn’t expect sports teams to suddenly become AI experts,” he said. “So Catapult is still on a growth trajectory and I wouldn’t expect that to be changed by AI.”

Others such as, Rob Crookston, Bell Potter’s Investment Strategist agree that AI is set to lift corporate profits, but recommend investors get exposure at source by buying into US technology companies.

“US profit growth remains very strong and AI-driven, a structural tailwind we don’t see fading anytime soon,” said Mr Crookston.

Bell Potter thinks investors should put new money outside Australian shares for diversification, arguing the local market may struggle if AI-driven earnings upgrades are not enough to offset the damage from higher rates and a slowing economy.

The broker also tips another strong year for emerging market equities as the AI boom continues to produce rocketing profits for high-tech Asian manufacturers.

Dividend investors

Mr Hemming said investors could also look beyond AI beneficiaries and chase old-fashioned dividends, particularly after Labor’s capital gains tax changes made income more attractive relative to growth-style investments.

Hemming says investors have two options. One is to buy businesses on 5 per cent dividend yields today and assume they’re sustainable. The other option is to buy a business on a lower yield, with potential to grow dividends over the next five years or so.

“Once the market gets confidence some of the retailers can sustain a base level of dividends you’ll see money go back into those shares,” he says. “Nick Scali is a quality company with growth potential in the UK.”

The retail offers a trailing yield of 4.5 per cent based on dividends of 72 cents paid over the last 12 months and Tuesday’s share price of $15.80.

Hemming also tips online retailer Kogan for medium-term dividend growth for anyone prepared to take on more risk.

“Kogan has been through the wringer a bit, but I think it’s offering is actually really good,” says Hemming. “They’re almost loss leaders by selling lower margin products but they capture the customers and then sell them higher margin services like mobile phones, insurance that offers higher margin, recurring revenues. The stock has started to bounce and I could see that continue.”

On the analyst’s numbers the discount retailer offers a trailing dividend yield of around 4 per cent.