The most recent comments from US corporate executives show unprecedented attention to the risk posed by rising wages for profits. During the Q2 earnings call conferences, the percentage of companies that referenced salaries posted its highest level since at least 2010 .
The Wage Tracker , the model that measures the evolution of wages at Goldman Sachs, already shows wage growth of 3.2%, the fastest pace since 2008 , and its Wage Survey Leading Indicator is at the highest level since 2000 .
Labor costs account for only 13% of median earnings for S&P 500 companies, and historical correlations support the conclusion that the large-cap index is relatively insulated from wage pressures.
However, according to Goldman Sachs strategist Ben Snider, the sensitivity of earnings to labor costs varies by market and sector. In an analysis prepared by his team, it is estimated that a 100 basis point acceleration in salary growth would reduce the earnings per share (EPS) of the S&P 500 by just 1% , other things being equal, in line with the historical relationship between benefits and wages.
The information technology sector has labor costs equivalent to 14% of revenues, above the S&P 500 average. Even so, given that the technology sector is also the one with the highest profit margins, its Profits are the least vulnerable to a 100 basis point acceleration in wage growth.
That said, the industrial sector, with high exposure to labor costs and low profit margins, appears the most vulnerable, followed by the consumer staples and consumer discretionary sectors. Small-cap companies tend to be more exposed than large-cap companies, largely because they have lower profit margins.
Labor costs for the Russell 2000 are equal to 16% of total revenue, compared to 11% for the S&P 500. Across America’s businesses, including small private companies, employee compensation represents 28% of revenue , consistent with its average percentage over the past 30 years.
Among equity sector groups, tech hardware, consumer services, capital goods and transportation are especially vulnerable to the risk that low-end wage growth will remain high.
Median Russell 3000 values in these industry groups have high labor costs relative to earnings and have also experienced strong historical correlations between their costs and low wage growth. Consumer services include many low-wage leisure and hospitality sectors that have recently faced particularly severe difficulties in the labor market, such as restaurants and hotels.
“We expect wages to continue to be a key point in the market in the coming years, despite the fact that our economists anticipate that restrictions on the job offer will be reduced in the coming months,” Snider said in a report published this week.
In it, he explains how Goldman foresees that the unemployment rate in the US will return to almost the lowest level in the last 50 years, 3.5%, by the end of 2022 , which will force companies and investors to face again a tight labor market and prospects for strong wage growth. It also adds that the recent attention of those responsible for fiscal and monetary policy in promoting employment should further increase the importance of labor costs for the profits of companies in the future.