- Accelerating wage growth in the US would put the most pressure on industrial and consumer stock gains on the S&P 500, Goldman Sachs said.
- A 100 basis point increase in wages would reduce industry earnings per share by 1.4%.
- Rising oil prices would help mitigate a profit surge for the energy sector.
There are signs that US wage growth is moderating, but if it picked up again, the industrial and consumer sectors on the S&P 500 would be most at risk to their earnings, Goldman Sachs said in a research note on Tuesday.
The tightest labor market in post-war history was highlighted in the July nonfarm payroll report, which created 528,000 jobs, more than double what economists had expected. Goldman Sachs said its economists’ Wage Tracker shows wage growth of 5.5% year over year.
However, the investment bank said a recent decline in job openings and a downward bend in wage surveys are possible signs that the risk to profits from rising wages has peaked.
“Our economists expect the labor market to gradually rebalance and wage growth to moderate. However, if wage growth remains surprisingly strong, stocks with low wage costs should outperform,” said Ben Snider, senior strategist on Goldman’s US portfolio strategy team. .
The company said its analysis of company-reported employee compensation data suggests that accelerating wage growth by 100 basis points would reduce S&P 500 earnings per share by about 1%. However, the impact differs per sector.
Industrial and consumer stocks face the greatest profit risk from rising wages, while energy and real estate stocks are the most isolated. “The vulnerability of corporate earnings depends on revenue trends, exposure to labor costs, and profit margins,” says Snider.
Within the S&P 500, manufacturing and services have low margins and the highest exposure to labor costs, which make up 21% of the industry’s revenue.
A 1% increase in labor costs, all else equal, would reduce industrial sector revenues by 1.4%, the highest sensitivity of any sector. Revenues for consumer staples and discretionary groups would be reduced by 1% and 0.8% respectively.
While the information technology sector also has high labor costs relative to revenue, it has the highest EBIT margins of any industry and that would result in a 0.5% wage cut if wage growth accelerated by 100 basis points.
Energy, on the other hand, is the least vulnerable, largely due to growing EBIT margins following the surge in oil prices. Energy earnings per share would lose “just 0.2%” compared to 0.5% last year, when the industry’s margins were much lower, Goldman said.
Goldman economists expect wage growth to slow to 3.5% by 2024. “For context, wage growth peaked at about 3.2% during the last cycle in 2019,” it said.
Small-cap stocks, which are generally more exposed to economic developments, are more vulnerable than large-cap stocks to wage pressures, the bank said.