Mr Ryan said there have already been some signs that the reporting season could be somewhat disappointing.

“Firstly, while earnings per share (EPS) for the market may be flat at an aggregate index level, it is clear to us the resources sector is really driving profits,” he pointed out.

“Without resources, the ASX 200 presents a relatively weak underlying market. That’s why there are so many forms of stimulus now being applied to the domestic economy.”

He also noted that there are a number of downgrades coming through, particularly in the domestic-focused stocks in retail, building materials and sectors with large discretionary spending like automobile sales.

“Retail and consumer companies appear to be struggling amid slowing economic growth and falling house prices,” Mr Ryan said.

“We think the stimulus delivered to date may be able to help slow the declines and stabilise house prices, but our medium-term outlook for that market looks very challenging, particularly for highly leveraged households and companies.”

Banks are also facing a difficult outlook, he said, with increasing capital requirements reducing their equity returns at the same time as rapidly falling interest rates eat into their margins.

“As a result of these factors, we think the August reporting season is going to be a volatile one as lofty valuations meet the grim reality of falling profitability,” he said.

There are some sectors, however, that are expected to perform well, he said, such as mining where strong commodity prices and a weak Australian dollar means margins are huge.

“Some sectors like iron ore are heading back towards all-time highs due to supply issues for Brazilian miners and fresh Chinese stimulus. LNG-focused companies also continue to enjoy high contracted LNG prices,” he said.

“After a strong rally, we will be looking very closely and trying to be cautious as we move into reporting season for fears that profits disappoint the market after such a strong run.”

SMSF Advisers and their clients, he said, should be looking at opportunities among defensive companies with under-geared balance sheets, good cash flows and margins, and resilient business models.

“If investors shift to a defensive posture, they will likely be better placed to weather any fallout come August,” he said.