It’s not going to be pretty, with company earnings expected to drop by around 15% compared to the 2019 financial year.

Despite that decade-high earnings decline, the ASX 200 index has already rebounded more than 30% since its low point in late March. While some companies have continued to provide trading updates, overall, investors have been operating under a cloud of uncertainty.

Shrugging off that uncertainty, the strength of the recovery shows that investors are still confident about the future.

The $70 billion JobKeeper and $14 billion JobSeeker packages have certainly played a part in keeping some sectors of the economy buoyant in recent months.

But with the market currently trading on a forward PE of 21 – compared to a 10-year average of 14.4 – the question is this; can share prices keep rising when Australia’s economic recovery is likely to take a long time?

According to Morgans’ analyst, Andrew Tang, the focus this reporting season will be not the results for the financial year just ended, but what management says about the future.

“We see the provision of formal earnings guidance for the current year as far less likely due to uncertainty related to COVID-19,” Tang says.

“Although we expect companies that do address that uncertainty and provide some clarity of the longer-term outlook will be rewarded”.

Tang warns that as we’ve seen in the last six months a lot can change very quickly, but says some sectors of the market have shown resilience in the lock-down economy, including IT, consumer staples and healthcare.

“But as the economy begins to open up, those advantages will reduce, and investors are likely to start returning to more cyclical stocks,” Tang says.

Income-focused investors, particularly those with exposure to the major banks, have been hit hard in recent months, with a series of cancelled or deferred dividends.

Morgans suggests there may be some better news later in the year, with the Big Four likely to declare dividends in November.

Morgans also points to a number of factors which could potentially derail a recovery. With the JobKeeper and JobSeeker lifelines being progressively wound back after the end of September, company earnings and employment will both need to pick up in the absence of ongoing government support.

A mini boom in retail spending fuelled by government payments, together with $30 billion withdrawn from superannuation, may not be sustained.

And at the end of May, $266 billion in loans had been deferred, including 11% of housing loans and 18% of small business loans.

Although remaining cautious about the outlook, and not expecting company earnings to return to pre-pandemic levels for another two years, Morgans says volatility will continue to create tactical opportunities for investors.

And reporting season will certainly highlight some of those opportunities.

For expert guidance in navigating the current market, get in touch with your local Morgans office.