Market Outlook: Turkish Corporate Earnings Fail to Impress as Inflation and Rates Bite

Muted Earnings Season Disappoints Investors

In Turkey’s stock market, quarterly earnings seasons are typically moments of heightened investor excitement, with increased stock-specific movements as companies reveal their financial performance. However, the recent reporting cycle has failed to generate such enthusiasm.

According to analyst Zeynel Balcı, the key reason lies in the widespread release of disappointing earnings—either negative results or profits that fell short of previous periods. The expectations were already low, but the actual results still underwhelmed.

Core Pressure Points: Inflation Accounting, Rates, and FX

A significant number of Turkish firms posted weaker earnings in Q1, reflecting the combined impact of a slowing economy, inflation accounting, and rising financial costs. The Istanbul Chamber of Industry’s (ISO) recent “Top 500” report revealed that financial expenses consumed a staggering 97% of companies’ operating profits, while real (inflation-adjusted) sales have declined for the past three years.

Persistently high interest rates continue to suppress profitability at the micro level. However, bringing rates down hinges on achieving sustained disinflation. That’s why any improvement in consumer price inflation is now being interpreted as a signal that the Central Bank of Turkey (CBRT) may begin a rate-cutting cycle in the coming months.

Banking Sector Takes a Hit as Earnings Drop

The banking sector, highly sensitive to interest rate dynamics, has seen a sharp reversal in earnings. After a temporary decline in policy rates earlier this year, the CBRT raised its key interest rate back to 46% in its March 22 meeting—reversing a prior cut from 50% to 42.5%. This rate increase immediately translated into higher loan and deposit rates, impacting net interest income.

Data released by Turkey’s banking watchdog BDDK reveals the extent of the downturn: banking profits dropped to TL 48 billion in April, down from TL 98 billion in March and TL 71 billion in February.

This earnings slump came despite initial optimism following disinflation and the CBRT’s early-year rate cuts. However, the softer-than-expected May CPI reading—1.53% monthly and 35.41% annually—rekindled optimism in the equity market. Bank stocks led the rally, given their status as blue-chip favorites among foreign investors and their outsized weight in the Borsa Istanbul index.

Will the CBRT Cut Rates on June 19?

With inflation finally showing signs of easing, market chatter around potential rate cuts is intensifying. Many now view the June 19 CBRT Monetary Policy Committee meeting as a potential turning point, though some analysts argue it’s still too soon and suggest cuts may instead begin at the July 24 or September 11 meetings.

Ultimately, the central bank’s decision will hinge on a broader mix of macroeconomic indicators—beyond inflation alone—including exchange rate dynamics, global financial conditions, and increasingly, domestic political developments.

What Should Investors Watch in Earnings Reports?

For equity investors, it’s no longer enough to focus solely on revenue growth or net income. In a high-interest, high-currency-volatility environment, leverage and liquidity metrics are just as important—if not more.

Debt ratios, current ratios, liquidity indicators, and cash flow positions must be closely scrutinized. Among these, financial liabilities and interest expenses are especially critical as they directly impact bottom-line profitability.

In addition to EBITDA, gross profit, net profit, and operating margins, analysts also monitor valuation metrics such as enterprise value/EBITDA, price-to-earnings (P/E), and market value/book value. A company’s net FX position is another red flag area, especially with TL depreciation and FX volatility continuing to challenge corporate balance sheets.

Abdurrahman Yıldırım: Turkish Corporates Face Growing Exchange Rate Risk

Sector Rotation: What to Favor in Growth vs. Slowdown

Sector rotation is increasingly dictated by macroeconomic conditions. In an expanding economy, cyclical sectors such as automotive and white goods are typically early movers. However, in times of stagnation or contraction, defensive sectors—where demand remains inelastic—come to the forefront.

Food, healthcare, and telecommunications top the list of such defensive plays. These sectors offer relative resilience even during economic downturns, as people continue to consume essentials, require medical care, and depend on communication services regardless of market conditions.

Conclusion: Hope Hinges on Disinflation and Rate Cuts

In summary, the latest earnings season in Turkey failed to ignite investor enthusiasm. However, with CPI readings improving and expectations rising for a CBRT rate cut in the coming months, market sentiment may shift.

More favorable financials could return in the second half of the year—provided inflation moderates and monetary easing resumes. Until then, earnings quality, balance sheet strength, and sector-specific resilience will remain crucial to equity selection.

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