Goldman Sachs: Stocks Set to Benefit from Slowing Wage Growth

According to Goldman Sachs Group Inc., stocks with high labor costs are well-positioned to benefit
as wage growth slows, providing a boost to profit margins.

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According to the bank’s recent analysis, wage growth in the U.S. labor market has slowed to 3.9%,
down from a peak of 6% in August 2022, and is expected to remain steady through 2026.

This easing of wage pressures comes as the labor market rebalances, with fewer companies reporting labor shortages during earnings calls. Goldman Sachs notes that the “slackening labor market” is supported by both macroeconomic data and corporate commentary, as the percentage of S&P 500 companies discussing labor shortages is now at its lowest level since 2019.

The bank also highlights that labor costs currently account for 12% of total revenues for the overall S&P 500 index and 14% for the median stock. It estimates that a 100-basis point change in labor costs would impact the earnings per share (EPS) of the S&P 500 by 0.7%, with some sectors more sensitive than others.

For example

the consumer staples sector, where labor costs account for 9% of revenue and EBIT margins are relatively low, could see a 1.0% increase in EPS if wage growth continues to slow. In contrast, the information technology sector would see only a 0.5% increase in EPS, even though labor costs represent 18% of sales, due to its high EBIT margins of 32%.

Moreover, Goldman Sachs reflects on the recent market performance of labor-cost-sensitive stocks.
A neutral basket of S&P 500 stocks with the highest labor costs has outperformed its low-labor-cost counterpart by 70 basis points year-to-date, with the greatest outperformance since July.

The note states, “This suggests that investors are confident that corporate earnings pressures from wages will continue to ease.”

Goldman Sachs analysts added, “Stocks with high labor costs should continue to outperform those
with lower labor costs as wage growth continues to decelerate.”

The bank expects wage growth to decline to around 3% and remain steady through 2026.
Additionally, downside risks in the labor market may further reduce wage pressures.

Currently, stocks with high labor costs are trading at only slightly higher price-to-earnings (P/E) ratios compared to low-labor-cost stocks,
and Goldman Sachs notes that valuations have not been a strong predictor of future returns.

Goldman Sachs: Stocks Set to Benefit from Slowing Wage Growth

Goldman Sachs: Stocks Set to Benefit from Slowing Wage Growth

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