ASX 200 braces for confession season as profit downgrades roll in ahead of reporting season

It's fair to say that the season kicked off much earlier this year, as the US-Iran conflict, re-acceleration in inflation, three consecutive RBA rate hikes and abysmal consumer confidence forced many companies to update the market and/or temper their prior expectations.

The most notable set of updates came from retail and consumer-facing companies in early May, which noted:

This late March inflection point has now materialised into earnings downgrades, with UBS noting that all sectors outside of mining and energy are now in "downgrade mode", with more to come over the next few months.

The latest batch

On Wednesday, shares in Baby Bunting (ASX: BBN) tumbled 10.6% after the company cut its FY26 sales and net profit expectations.

• FY26 NPAT now seen at $16.0-17.0m, down ~11% on prior guidance of $17.5-19.5m and 3% below market expectations of $17m
• FY26 comparable store sales growth now ~3.5% vs. prior guidance of 5-7%
• CEO comment: "The three RBA cash rate rises in the second half, together with higher fuel prices, weighed on consumer spending and added to our distribution costs. Sales across our non-refurbished store network did not meet plan over the last seven weeks, driven by softness in prams and car safety categories relative to expectations."

Today,Judo Capital (ASX: JDO) cratered 45% after downgrading both FY26 and FY27 expectations.

• FY26 PBT guided to $163-169m, down from prior lower-end guidance of $180-190m and below ests of $180.7m (8% miss at midpoint)
• FY27 PBT guided to $210-220m, well short of ests of $255.1m (16% miss at midpoint)
• CEO comment: "We continue to see strong underlying momentum in the business. Recent credit outcomes have been driven by a small number of customers, who we are actively working with. These exposures have deteriorated subsequent to the customer-by-customer review undertaken in the third quarter and reflect recent, borrower-specific developments."

Worley (ASX: WOR ) also doubled the earnings drag it expects from the Middle East conflict this morning, with the stock down around 8.5% this morning.

• Adverse impact to FY26 underlying EBITA now estimated at up to $60m, vs. prior guidance of $30-40m
• Middle East conflict continues to disrupt existing projects, though no cancellations have occurred
• Customers continue to delay the start and award of new projects
• Stronger Australian dollar in H2 estimated to translate into a $50m hit to FY26 underlying EBITA

Key takeaways

#2 Not a time for high expectations. Judo Capital is a stock loved by many for the significant growth runway in the SME market, where the company has a mere ~2% market share.

"While we recognise rising credit quality risks, we believe risks are now partly reflected in prices. High provisions should support Judo through a modest credit cycle," Macquarie analysts said in a note dated 24 April.

But then you get a day like this, where Judo trades like a meme coin and analysts will likely have a busy day of hosing down earnings expectations.

The bottom line

Fast forward to today and you have a material FY26-27 downgrade tied to "specific provision increases for three exposures across different sectors." So if an SME lender has to keep raising provisions, what does that tell you about the state of the economy?

So brace for a volatile confession season, one that will look nothing like last year, when the market was pushing record highs and valuations were rather frothy. Plenty of stocks are now down 20-30% over the past twelve months, and earnings expectations are finally starting to fall, which clears the way for companies to beat a lower bar. But the path of least resistance still looks lower, against a backdrop of hawkish central banks, sticky inflation and a weakening macro picture.

This article was first published on Market Index, on Thursday 25 June.