What the October wage spike means for companies and stocks
On corporate earnings calls, CEOs aren’t sounding the wage inflation alarm for nothing.
Friday’s job report showed a 3.1% year-over-year increase in average hourly earnings as of October – the biggest growth in almost a decade.
“Wage pressures have been building up for a while, with low unemployment and worker shortages everywhere from truck drivers to software engineers,” said Nick Colas, co-founder of DataTrek Research. “This looks like a new normal to me as long as the US economy continues to grow.”
Higher wages crimp margins for companies. But in order to see a meaningful ding to margins, annual wage growth would need to exceed 3.5%, according to Scott Wren, senior global equity strategist at Wells Fargo Investment Institute.
Plus, earnings growth for the third quarter now stands at 22.5% year-over-year, according to FactSet, which gives companies some room to absorb higher wages.
“Companies that have invested in productivity improving technology should be fine [from higher wages],” Colas added.
Wren also thinks the market has been pricing in the likelihood of wage growth over 3% for a few months.
“If we would have seen a 3.1% print 12 months or 18 months ago, that would have crushed the S&P 500 (^GSPC),” Wren said. “If you recall on Feb. 2nd of this year when that 2.9% wage growth number came out — that’s what really triggered that 10% pullback.”
Soon after Friday’s jobs report, stocks took a hit on fears the strong wage data justifies the Federal Reserve’s current pace of normalization. Stocks were also weighed down by Apple’s (AAPL) earnings, released on Thursday, which sparked growth fears for the trillion dollar tech giant.
Longer-term, the strong wage data is good for stocks, according to Colas.
“Going into holiday 2018, this is a good development for stocks from a consumer spending perspective,” he said.
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm. Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and reddit.
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