Stocks That Could Gain from Slower Wage Growth, According to Goldman

Stocks with elevated labor costs are set to gain as wage growth slows, enhancing profit margins, according to a recent analysis by Goldman Sachs.

The analysis reveals that wage growth in the U.S. labor market has reduced to 3.9%, down from a peak of 6% in August 2022, with expectations for stabilization through 2026.

This decline in wage pressures coincides with a rebalancing of the labor market, as fewer companies mention labor shortages in their earnings calls. Goldman Sachs highlights that the share of firms in the S&P 500 discussing labor shortages is at its lowest level since 2019, indicating a loosening labor market supported by macroeconomic data and corporate commentary.

Additionally, the bank outlines that labor costs currently represent 12% of total revenues for the overall S&P 500 index and 14% for the median stock. A 100 basis point change in labor costs is estimated to affect S&P 500 earnings per share (EPS) by 0.7%, with varying sensitivity across different sectors.

For example, Consumer Staples, where labor costs account for 9% of revenues and have relatively low EBIT margins, could see a 1.0% increase in EPS if wage growth continues to taper. In contrast, the Information Technology sector, which has labor costs making up 18% of revenue but higher EBIT margins of 32%, would only experience a 0.5% EPS boost.

Goldman Sachs has also observed the market performance of stocks sensitive to labor costs. Their analysis indicates that a sector-neutral basket of S&P 500 stocks with the highest labor costs has outperformed its low labor cost counterparts by 70 basis points year-to-date, with the most significant outperformance occurring since July.

This trend implies that investors are optimistic that wage pressures on corporate earnings will continue to ease, according to Goldman Sachs analysts.

They predict that wage growth will fall to approximately 3% and remain steady through 2026, with downside risks in the labor market potentially further alleviating wage pressures.

At present, stocks with high labor costs are trading at only a marginally higher price-to-earnings (P/E) valuation compared to those with low labor costs. Goldman Sachs notes that valuations have not historically been a strong indicator of future returns.