This means the pool of top employees within the labor market is shrinking. Thus, for companies to attract good talent, increasing wages would be the next logical solution. Furthermore, the ongoing expansion of the economy makes this solution very viable for companies.
However, what works in the job market may not necessarily work on Wall Street. Case in point, the situation of most S&P 500 companies right now. While most companies within the index have resurrected their profit margins and growth from a year-long recession, stock prices seem to stall.
Margins for most non-energy companies are dancing around the record high from the last three years, and yet investors are already preaching the "end of days." Thus, smart investors are already starting to channel funding to companies with low labor costs. The reason behind this is because investors think that these kinds of companies will be able to survive the effects of the wage hike.
Goldman Sachs has a special group containing 50 companies with low labor costs. A few big names that are within the basket are Facebook, Citigroup, Exxon Mobil and Netflix. According to Goldman Sachs, the basket has experienced a 22% gain since the month of July last year. When you compare that number to the group containing high labor cost companies, the pool of low labor cost companies is already ahead by 100%.
Companies that are in the high labor cost pool include Quest Diagnostics, Morgan Stanley, General Mill, and Chipotle.
In most cases, stock prices move closely with the company's earnings. Higher wages means that the company will lose a portion of their earnings, and that's not good on paper and for the investors.
One way to offset the balance would be to find a way to boost the net income. However, the best-case scenario you can hope for is the two cancelling each other out. This is according to Goldman Sachs. When you look at it realistically, the forecast is going to be different. In fact, with the wage hike, Goldman Sachs is forecasting a shrinkage of 1% in earnings. For small-cap companies, the shrinkage in profits is expected to be around 2%.
Goldman Sachs also added that while the long-term growth will eventually go upwards, the rising wages may be a significant blow to the rising momentum of the S&P 500. Unless Trump's proposed corporate tax reform materializes, the effects of the wage hike will be like a gloomy cloud on the market for years to come.
Thus, it's worth questioning which sectors are most vulnerable to the effects of the wage hike. According to Goldman Sachs’s analysis, it's the companies with the biggest negative earnings-per-share that are the most vulnerable. However, Goldman Sachs analysts stated that this is just the best guess reactional market prediction is difficult at best.