- stockbrokers anticipate a pause in the equities rally
- 2012 rally has been all about higher PEs, with no earnings support
- some stockbrokers have lined up their favourites, as well as which stocks best to avoid

By Andrew Nelson

With equity markets having been on the run over the last three months, stockbrokers are starting to take a much closer look at the outlook for corporate earnings to assess what are some fairly lofty looking valuations in some cases.

Analysts at BA-Merrill Lynch note that at a current 13.3x forward earnings, the Australian market is currently trading at its highest multiple in three years and only a tad below the long-term average of 13.6x. With the broker of the belief it is unlikely we’ll see any sort of sustained earnings upgrade cycle in the near-term, the market is starting to look stretched.

With share prices now ahead of earnings, the broker has outlined a number of stocks it sees as vulnerable to correction. Stocks that have rallied of late despite consensus downgrades to earnings forecasts make up many of the top spots. Domestic cyclicals like Seven West (SWM), Fairfax ((FXJ)), Toll Holdings ((TOL)), Boral ((BLD)), Tabcorp ((TAH)) and Seek ((SEK)) feature prominently, especially given the broker sees little chance of earnings upgrades among these names because the economy is slowing and RBA rate cuts are not having the desired effect. In fact, the broker notes retail sales have fallen short of expectations four times in the last five months.

There were a few other stocks that rated a (dis) honourable mention from BA-ML including Macquarie Group ((MQG)), Incitec Pivot ((IPL)), Wesfarmers ((WES)), ASX ((ASX)) and Boart Longyear ((BLY)). Interestingly, Citi downgraded its call on Incitec Pivot to Sell just this morning.

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