As the economy teeters at full employment, rising wages are beginning to eat into the profits of some U.S. companies. That’s good news for U.S. workers, but the steady rise in wages poses a threat to U.S. companies after a streak of double-digit quarterly profit growth that has helped underpin the broader stock market.
Economists at Goldman Sachs predict that every percentage-point increase in labor-cost inflation will drag down S&P 500 earnings by 0.8 percent. In total, labor costs amount to 13 percent of revenue for S&P 500 companies.
The industrials sector is most susceptible to increasing wages, Goldman reports. Those companies have a 21 percent ratio of labor costs to revenue, the most out of the S&P’s 11 sectors. The consumer discretionary sector, the S&P’s best-performing sector this year, is also likely to take a hit if wage growth accelerates.