Investors focus on retailers as wages rise

Retailers and restaurants tend to have a large number of employees and should be among the companies most likely to experience the biggest impact of increased wages.

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Morgan Stanley strategists wrote in a note this week that hotels, restaurants, retailers, energy equipment and services and computer services may be among the industries most exposed to rising wages.

"The pressures on wages have been accentuating for some time, but we finally saw them really burst … in the October employment report, so I think it will continue to pose problem, "said Kristina Hooper, chief global market strategist at Invesco in New York.

Concerns about the potential for wage inflation have increased, with economic data showing that US labor market conditions are tightening.

Pay pressures could become a growing concern as growth in S & P 500 earnings per share is expected to slow to around 9% next year, after earnings gains from taxes in 2018, valued at 24%, according to Refinitiv's IBES data.

In the recent report on US employment for October, wages recorded their largest annual increase in nine and a half years.

A separate report showed that the cost of employment index, the largest measure of the cost of labor, rose by 0.8% in the third quarter, after a 0.6% increase in the second quarter, bringing the year-over-year growth rate to 2.8%.

A record 7.14 million vacancies are vacant and employers have been forced to raise salaries to attract employees.

Online retailer Amazon.com Inc. announced last month that it would increase its minimum wage to $ 15 per hour for US employees starting in November.

In addition, the odds of a higher federal minimum wage increased this week as Democrats took control of the House of Representatives during congressional elections.

Among companies that have discussed the impact of rising wages, McDonald's chief financial officer, Kevin Ozan, said in a phone conversation with badysts on October 23 that the costs of the workforce were part of last quarter's margin pressures.

Chipotle Mexican Grill's chief financial officer, John Hartung, told badysts that labor costs will continue to rise in the fourth quarter, and that Clorox Co executives have said that the company's costs will increase. wage inflation had been higher than forecast.

In addition, Clay Williams, President and CEO of National Oilwell Varco, said that "steel and labor costs continue to increase, eroding the gains of margin resulting from price increases in many of our businesses ".

Admittedly, the tax reform adopted by Congress at the end of 2017 has helped companies offset many additional expenses, and the S & P 500's earnings growth in the third quarter is about to be the highest since 2010. .

Lower tax rates should allow higher wages and maintainable margins without the need to raise prices, according to Russell Price, senior economist at Ameriprise Financial Services in Troy, Michigan.

Goldman Sachs strategists recently said in a note that wage inflation was one of the biggest risks to the S & P 500's profit margins, as well as higher rates and rising cost of debt.

"Management has expressed confidence in their ability to offset pricing costs through price increases or a reorganization of the supply chain, but executives have seen increased competition for work and increasing wage pressures." they wrote.

Some businesses, especially retailers, may need to pbad on higher labor costs to maintain minimal profit margins.

"When wages rise to levels that could cause inflation, this could have a negative impact on earnings growth," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.