Goldman says these companies with high labor costs should benefit as job market slows

By Steve Goldstein

Goldman Sachs identifies companies with high labor costs relative to their revenue

Consumer confidence fell by the most in three years, and investors responded by sending the S&P 500 index and the Dow Jones Industrial Average to new record highs. Such is the stuff of bull markets.

But one of the reasons U.S. consumer confidence fell was the perception the labor market is slowing, which is confirmed by a host of different reports, most notably the rise in the unemployment rate and the slowdown in payrolls growth. The flip side of a labor market deteriorating is that wage pressure on profit margins eases.

That's a point made in a new report from Goldman Sachs, which put together a high labor cost basket of stocks. These stocks, at the median, had a labor cost of 33% of last year's revenue, compared to 14% for the S&P 500 SPX as a whole.

The list is interesting. Hotels and restaurants are obviously labor intensive, and Goldman's list includes Hilton Worldwide (HLT), Marriott International (MAR) and Olive Garden owner Darden Restaurants (DRI).

Perhaps more surprising are the technology sector names, including Facebook owner Meta Platforms (META). Goldman makes its basket sector neutral, so the way to read Meta's inclusion is that it has higher labor costs relative to sector peers. Netflix (NFLX) has labor costs of just 8% of total revenue; Apple (AAPL) is even lower at 4% - both companies are on Goldman's low labor cost basket.

Through last week, the higher labor cost basket has modestly outperformed the lower labor cost basket, by 70 basis points this year.

"High labor cost stocks should continue to outperform low labor cost stocks as wage growth continues to decelerate," say strategists led by David Kostin. They note the Goldman economics team forecasts wage growth to slow to 3% and remain stable through 2026, and that risks to the labor market appear skewed to the downside.

The market

U.S. stock index futures (ES00) (NQ00) eased from record levels early Wednesday. The yield on the 10-year Treasury BX:TMUBMUSD10Y was 3.75%. Chinese stocks extended gains after Tuesday's announcement of stimulus.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              5732.93    1.75%  1.90%   20.19%  34.15% 
   Nasdaq Composite                                                     18,074.52  2.53%  1.80%   20.41%  38.36% 
   10-year Treasury                                                     3.756      5.10   -8.40   -12.49  -85.97 
   Gold                                                                 2681.4     3.74%  5.61%   29.42%  41.63% 
   Oil                                                                  71.11      2.83%  -4.40%  -0.31%  -24.12% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

August new-home sales are due for release, as a speech from Fed Gov. Adriana Kugler comes just as the market closes at 4 p.m. There's a $70 billion auction of 5-year notes.

The U.S. economy will slow down next year but steer clear of a recession as the Federal Reserve cuts interest rates, the Organization of Economic Cooperation and Development said.

KB Home stock (KBH) fell as the home builder's results fell short of analyst estimates.

SAP shares (SAP) fell on a report it's the target of a probe into overcharging U.S. government agencies.

General Motors (GM), Ford (F) and Rivian Automotive (RIVN) were downgraded by Morgan Stanley.

Stitch Fix stock (SFIX) tumbled as it reported a wider-than-expected loss.

Micron Technology (MU) reports fiscal fourth-quarter results after the close.

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The chart

Rick Rieder, the chief investment officer of global fixed income at BlackRock, says it's the golden age of fixed income. "While we can still expect equities to do well over the medium term, today your equity risk premium, or your compensation for taking equity risk, is at +20 year lows. Conversely, yield in the belly of the curve, relative to inflation expectations, remains historically high, offering attractive real yields across fixed income," he said in a message on the X social-media platform.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   DJT     Trump Media & Technology 
   NIO     Nio 
   TSM     Taiwan Semiconductor Manufacturing 
   PLTR    Palantir Technologies 
   AAPL    Apple 
   BABA    Alibaba 
   AMC     AMC Entertainment 

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-Steve Goldstein

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09-25-24 0909ET

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