Slow turn in earnings

HAVE earnings for Corporate Malaysia finally turned the corner?

This is the question likely on the mind of investors following the performance of local companies in the second quarter (2Q26) after a relatively subdued 1Q26 earnings season.

The first three months of the year offered investors little reason to cheer. While Corporate Malaysia did remain resilient during that period, earnings growth was uneven and many industries continued to struggle with increasing operating costs and softer margins amid an uncertain global environment.

“The 2Q26, however, appeared to have provided some early signs that the earnings picture may be improving,” says a seasoned industry observer.

Still, many analysts reckon that although earnings may have improved, helped largely by better economic conditions, it may be too early to conclude that earnings have seen their worst.

Berjaya Research Sdn Bhd head of research Kenneth Leong says while he believes that earnings have started to get better, the recovery remains uneven across sectors, with improvement concentrated in selected industries rather than representing a broad-based earnings upcycle.

Fortress Capital Group chief executive officer Datuk Thomas Yong believes that on the whole, corporate earnings for 2Q26 performed “slightly better” than expected, with more companies reporting positive or in-line results.

“This is an encouraging sign that improving economic conditions are boosting corporate profits,” the fund manager tells StarBiz 7.

However, Yong warns that many strong sectors – such as plantation, automotive, and technology – are cyclical, suggesting that earnings may remain volatile in the near term.

He feels that a “true” market turnaround will likely require better results from the consumer sector, which remains muted due to high costs and softer consumer sentiment.

Equally cautious on the consumer sector, Leong believes that while spending remains resilient, purchasing behaviour is becoming increasingly selective, with consumers prioritising value and essential products.

“This could continue to weigh on the consumer sector, particularly discretionary retailers and food and beverage operators that are facing higher operating costs and softer same-store sales.

“Meanwhile, the growing presence of ultra-low-priced platforms could potentially reinforce consumers’ price sensitivity and intensify competition within the retail landscape, adding another challenge to the sector’s earnings outlook,” he adds.

Malacca Securities head of research Loui Low says 2Q26 earnings, with their better year-on-year (y-o-y) and quarter-on-quarter (q-o-q)figures as well as fewer earnings misses, imply that things have turned slightly more positive.

However, he too remains cautious on consumer discretionary products, selected electronic manufacturing service companies, and businesses with weak pricing power as higher oil, energy and freight costs could pressure margins, particularly for companies unable to pass on costs to customers.

Like his counterparts, Mercury Securities head of equity research Ahmad Ramzani Ramli does not think that the worst is completely over for earnings.

“Corporate Malaysia’s earnings showed signs of turning the corner in 2Q26, with core earnings across the companies reviewed rising 15.4% q-o-q and 11.8% y-o-y, alongside fewer earnings disappointments.

“However, the recovery remains uneven, with downward revisions to full-year forecasts suggesting that a sustained upturn is not yet assured.”

All these views appear to point to one thing – there has been improvement, but a clear and complete turnaround remains elusive and that is likely to continue to weigh on the entire market.

Ahmad Ramzani reckons that the key risk in the second half of 2026 (2H26) is stronger economic growth, which may not translate into sustained corporate earnings improvement.

“Investors should monitor geopolitical developments affecting energy, freight and input costs and whether technology and data-centre projects actually convert into revenue and cash flow, particularly where valuations already anticipate strong growth,” he says.

Yong says that in 2H26, investors would do well to continue to monitor developments in the Middle East, which will continue to dictate the direction of energy and commodity prices, affect major central banks’ policies, and eventually impact the bottom lines of corporates.

Locally, Budget 2027 and the 16th General Election are things to keep an eye on, he notes, adding that the US mid-term elections in November is also something investors should follow closely as it may affect global fiscal and trade policies.

According to Malacca Securities’ Low, key risks include the ongoing Middle East tensions leading to persisting volatile oil prices, as well as US inflation and interest rates on top of Treasury yields, foreign fund flows and domestic project execution.

Berjaya’s Leong also counts the ongoing geopolitical tensions in the Middle East as a key concern.

“A sustained increase in energy prices could reignite inflationary pressures, raise operating costs for businesses and erode consumer purchasing power.”

Corporate earnings versus market performance

In theory, corporate earnings, or rather its growth, is one of the most important drivers of stock market performance.

In reality, however, there is often a disconnect. Blame this on market talk, market “psychology” or even valuations that fail to match companies’ actual values.

“Historically, improving corporate earnings translate into stronger market performance, provided forward-looking risks remain contained,” Yong says.

Because the market efficiently prices in expected positives, high-growth stocks often trade at elevated valuations in anticipation of future expansion, he says.

“Conversely, cyclical stocks frequently trade at depressed valuations when the market expects an earnings surge to be temporary. Hence, recent stock performances do not just reflect 2Q26 corporate earnings, but also the market’s anticipation of future earnings,” he adds.

Currently, the FBM KLCI trades at approximately 15 times 2026 price-to-earnings, matching its historical average.

From a broad valuation perspective, Yong reckons the market is neither expensive nor cheap.

“However, the FBM KLCI serves as an imperfect proxy for overall corporate earnings, given that key growth drivers – such as the technology sector – remain underrepresented in the index.”

Ahmad Ramzani says Malaysia’s 2Q26 earnings recovery supports selective optimism, but market gains have also reflected expectations of future growth and higher valuations.

“Construction and utilities have rallied faster than earnings forecasts have improved, increasing pressure on companies to convert data-centre projects into profits and cash flow,” he notes.

He adds that strong quarterly results have not always lifted share prices, as softer forward guidance raises concerns over earnings sustainability.

Ahmad Ramzani warns that subdued banking earnings growth could constrain the FBM KLCI despite stronger prospects among selected technology, engineering and renewable-energy companies.

“Sustained market gains require broader earnings upgrades, improving margins and stronger cash generation.

“Continued share-price appreciation alongside falling earnings forecasts would signal an increasingly fragile rally.”

Leong believes that currently, there is some disconnect between corporate earnings performance and the FBM KLCI.

“While 2Q26 corporate earnings have shown signs of improvement, the FBM KLCI has remained relatively subdued.

“One key reason is the index composition, where banking stocks carry a significant weightage of over 40%.”

Given that banking earnings have remained relatively neutral, the overall earnings growth of the FBM KLCI has been constrained, despite stronger performances from sectors such as technology, plantations and construction.

“This also explains why the broader corporate earnings recovery has not translated into a proportionate increase in the headline index,” he adds.

A stronger re-rating of the FBM KLCI would require not only continued earnings growth from the smaller and mid-cap sectors, but also a meaningful improvement in the earnings outlook of heavyweight banking stocks, he says.

“Hence, we believe the market could continue to see a divergence between the performance of the FBM KLCI and the broader market, with stock-picking remaining largely important.”

Low also feels that there is currently a disconnect between improving fundamentals and weak market sentiment.

“Earnings and economic growth have improved, but geopolitical risks and higher yields are compressing valuations.

“If these macro risks ease, stronger earnings could eventually translate into better market performance.”

Top sector picks

Low has a preference for the construction and utilities/power infrastructure sectors, selective technology and plantation companies, and banks.

Key drivers, he says, include data-centre investments, grid upgrades, infrastructure spending, artificial intelligence (AI)-related demand, resilient banking fundamentals and supportive crude palm oil (CPO) prices.

Yong says the technology sector is poised to sustain its growth momentum into 2027, driven by the AI-led semiconductor upcycle and robust order books.

Within the sector, companies with direct exposure to AI, data centres, and advanced packaging are projected to outperform those tied to traditional consumer electronics, he says.

Like Low, he likes the construction sector and says it is set to benefit from the continuous rollout of government infrastructure projects and heavy private sector investment in data centres.

“Companies are expected to deliver robust earnings growth underpinned by solid order books.

“Furthermore, sustained positive news flow from both the public and private sectors will likely continue to lift investor sentiment.”

Although it delivered uninspiring 2Q26 results on the whole, Yong says the banking sector remains fundamentally sound, supported by resilient loan growth, stable net interest margins, and robust asset quality.

This health is further underscored by a low and stable gross impaired loan ratio. With attractive dividend yields, the sector serves as a strong defensive income play for investors seeking stability, he adds.

For Ahmad Ramzani, selected construction and mechanical and electrical contractors, renewable-energy companies, healthcare providers and upstream plantation producers appear relatively well positioned moving well into the 2H26.

“Contractors and renewable-energy companies could benefit from executing secured, funded projects, while healthcare offers resilient demand and potential utilisation gains, and plantations could benefit from firm CPO prices, subject to production performance.”

He feels that the technology sector warrants greater selectivity following calls to slow AI development, favouring companies with confirmed orders and diversified customers.

“Existing projects may support near-term earnings, but investment deferrals could weaken future growth; consequently, stronger earnings will not necessarily translate into share-price outperformance, particularly where valuations already anticipate substantial expansion,” Ahmad Ramzani adds.

Leong expects construction, technology, plantations and renewable energy to be among the better-performing sectors post-2Q26, underpinned by relatively strong earnings visibility and structural growth drivers.

Like the rest, he also notes that the construction sector should continue to benefit from sizeable outstanding orderbooks, particularly among contractors with strong exposure to data centre developments.

The continued rollout of hyperscale data centres, alongside the expected acceleration in public infrastructure projects under the 13th Malaysia Plan, should support further order book replenishment and earnings growth, he says.

With domestic contract awards already reaching RM27.7bil in 1H26 and several major data centre and infrastructure projects expected to be awarded in 2H26, Leong also sees sustained job flow as an ongoing key catalyst for the sector.

“We also remain positive on the technology sector, driven by the ongoing AI and data centre investment cycle.

“Sustained hyperscaler capital expenditure should continue to support demand for semiconductors, advanced packaging, outsourced semiconductor assembly and test, high-performance computing and related infrastructure,” he says,

Leong says Malaysian technology companies with direct exposure to AI, data centres and advanced semiconductor applications should continue to enjoy stronger earnings visibility as the global semiconductor upcycle gains traction.

Plantation companies are also favoured as they should benefit from elevated CPO prices, supported by relatively tight palm oil fundamentals and potential weather-related supply disruptions.

“The onset or strengthening of El Nino could pose a risk to palm oil yields, particularly if prolonged dry weather affects fresh fruit bunch production, thereby tightening supply and providing further upside to CPO prices.

“This, in turn, should support plantation earnings, although the extent of the benefit will depend on the severity and duration of the weather conditions,” he notes.

Leong also remains constructive on the renewable energy sector as the industry moves from the award phase into project execution.

“The acceleration of large-scale solar or LSS5 and LSS5+ projects should drive higher engineering, procurement, construction, and commissioning activity and earnings recognition, while the rollout of other renewable-energy initiatives should provide additional job opportunities.”

All in all, most analysts are keeping their FBM KLCI targets intact for now.

RHB Research analyst Alexander Chia for one, says the research house’s end-2026 target for the FBM KLCI remains unchanged at 1,750 points. At last look, it was at 1679.21.

Prevailing geopolitical and global macroeconomic challenges will cap the market’s absolute upside, according to Chia.

“While earnings adjustments were positive, they were not enough to move the needle – the market will likely remain rangebound with downside support from robust liquidity conditions.”

In short, Malaysian corporate earnings has much room to grow, and when that growth is seen as sustainable, the market should make a significant shift out of its rangebound zone – theoretically, of course.