20160412-高盛-Rising_labor_costs_and_US_equities_Analyzing_the_impact_of_higher_wages_on_profits_and_performance_22页_537kb

Summary of "Rising labor costs and US equities"

Core Content

This report discusses the impact of rising labor costs on corporate profits and equity performance in the United States, particularly focusing on the S&P 500. It highlights how increasing wages, driven by a tightening labor market and political factors, may affect earnings and stock returns.

Main Points

• Labor Cost Trends:

  • Average hourly earnings growth has risen sharply, from $1.6%$ in early 2015 to $2.3%$ in 2016, though still below the long-term average of $3%$.
  • The labor market is tightening, with the unemployment rate at $5%$, close to the Fed's target.
  • The Fed's dovish stance has made labor cost inflation a more immediate risk.

• Impact on Earnings:

  • Each 100 bp acceleration in labor costs above the $3%$ baseline reduces S&P 500 EPS by approximately $0.7%$.
  • The S&P 500's net profit margins are near historical highs, making them more susceptible to wage pressures.
  • In 2015, operating EPS fell by $11%$ due to plummeting commodity prices, but with stabilization, EPS growth is expected in 2016.

• Sector Vulnerability:

  • Labor-intensive sectors with low margins, such as Industrials and Consumer Discretionary, are most vulnerable to rising wages.
  • REITs are more insulated due to their capital-intensive nature.
  • Consumer Discretionary and Industrials have historically stretched margins, making them more sensitive to cost increases.

• Investment Implications:

  • A new Low Labor Cost (GSTHLLAB) and High Labor Cost (GSTHHLAB) basket is introduced to help investors track the market's reaction to labor cost trends.
  • The Low Labor Cost basket has historically outperformed the High Labor Cost basket during periods of wage acceleration.
  • However, in 2016, the Low Labor Cost basket has lagged due to decelerating wage growth.
  • The Low Labor Cost basket currently trades at a $20%$ forward P/E discount compared to the High Labor Cost basket, suggesting potential outperformance if wage growth accelerates.

• Economic and Policy Drivers:

  • Fifteen U.S. states implemented minimum wage hikes in 2016, with some increasing wages by over $10%$.
  • Democratic candidates have proposed raising the federal minimum wage, increasing labor cost risks.
  • Wage growth has accelerated from $1.3%$ in 2012 to $2.3%$ in 2016, with Leisure & Hospitality and Information Technology seeing the fastest increases.

• Earnings Sensitivity Analysis:

  • A 1 percentage point increase in labor cost growth could reduce S&P 500 EPS by about $0.7%$.
  • The Industrials and Consumer Discretionary sectors have the highest earnings sensitivity to labor cost increases.
  • REITs have the lowest sensitivity, indicating better resilience to wage inflation.

• Future Outlook:

  • The report forecasts relatively flat margins for the S&P 500 through 2017, with the Energy sector being the main driver of margin expansion.
  • Automation and technology substitution could help reduce labor cost sensitivity in the long term, but this will not offset the near-term risks.
  • If wage growth continues to rise toward average, the Low Labor Cost basket is expected to outperform again.

Key Information

• Wage Growth: Increased from $1.3%$ in 2012 to $2.3%$ in 2016, nearing the long-term average of $3%$.
• S&P 500 EPS Impact: A 100 bp increase in labor cost growth could lower EPS by about $0.7%$.
• Sector Analysis:
  • Industrials and Consumer Discretionary have the highest labor cost sensitivity.
  • REITs and Energy are more insulated from wage inflation.
• Investment Opportunity: The Low Labor Cost basket currently trades at a discount and may outperform if wage growth accelerates.
• Methodology: The report uses a combination of government data and company filings to estimate labor cost impacts on earnings.

Conclusion

Rising labor costs, particularly in labor-intensive and low-margin sectors, pose a significant risk to corporate profits and S&P 500 earnings. While the overall market is expected to see flat margins through 2017, the Low Labor Cost basket is likely to outperform in an environment of accelerating wage growth. Investors should consider these baskets as tools to manage exposure to labor cost inflation.