Expect labor market strength to continue despite labor costs weighing on corporate earnings

Not everyone expects to see large-scale layoffs sweep across America, even as recession fears lurk and labor costs emerge as a top concern for businesses over the of the third quarter earnings season.

While the days of blockbuster post-pandemic earnings may be over, arguments for companies clinging to employees have also begun to surface, given the still-tight labor market and the struggle in recent times. years to find workers to fill vacant positions.

“It’s been a bit difficult for companies to get their hands on the workforce,” Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management, said over the phone.

But while higher labor costs can’t be entirely ignored, “I think the first salvo will be to reduce vacancies as companies tighten their belts a bit,” Mullarkey said.

A review of the first batch of quarterly earnings calls points to top executives focused on dragging labor costs.

Of the 20 companies in the S&P 500 SPX index,
+2.60%
which reported its third quarter results through Oct 6, 13 cited labor costs as a negative factor impacting earnings, revenue or profit margins, or as having an expected impact at the future, according to John Butters, principal earnings analyst at FactSet.

Analysts turned pessimistic on earnings as the Federal Reserve hiked rates sharply to combat high inflation, but S&P 500 companies were still expected to post 2.4% third-quarter earnings growth on an annual basis , according to FactSet. That figure would be the weakest revenue growth in two years.

A fuller picture of how earnings could shake will begin to emerge on Friday when big banks JPMorgan Chase & Co JPM,
+5.56%,
Morgan Stanley MS,
+3.55%,
Wells Fargo & Co. WFC,
+4.62%
and Citigroup Inc. C,
+5.17%
publish its third quarter results.

Many major banks have already announced reductions in mortgages and related activities as the booming real estate market has slowed significantly with soaring mortgage rates.

Staff reductions and hiring freezes have also affected Meta Platforms META,
+2.19%
and others in the once booming tech sector.

Lily: From Big Resignation to Forced Resignation: Tech Companies Turn to Layoffs After Huge Hiring Surge

Even with the pain of the higher rates TMUBMUSD10Y,
3.944%
hitting the economy, Fed Vice Chairman Lael Brainard in a speech on Monday said “there is ample room for margin recompression,” including at retailers and especially dealerships. automotive, where margins have increased during the pandemic by more than 180%, or 10 times the increase in the average hourly wage in the sector.

Mullarkey thinks companies can “meet in the middle” and give up revenue a bit to keep employees, but also to help prevent the economy from falling into a deeper recession.

Wage increases must ‘come from somewhere’

Supply chain issues and a strong dollar DXY,
-0.76%
also ranked high among concerns in the first batch of quarterly earnings calls, according to FactSet. But it’s wage pressures that have been growing at the fastest rate since the 1980s and a low unemployment rate of 3.5% that are really worrying top executives and Fed officials.

“Companies have almost no choice but to pay the salary increases that have to come from somewhere,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said over the phone.

Instead of layoffs, Ma sees the risk of companies losing employees to competitors as always high, especially amid remote working and a tight labor market that makes recession fears remote for many workers.

While not all speculative sectors are immune to further layoffs, he says companies that are the ‘nuts and bolts’ of the economy want to avoid having to scramble again to find workers. to even higher salaries in six to 12 months.

To that end, Ma spoke of a sea change in the balance of power that previously favored business over labor, since at least the global financial crisis more than a decade ago.

“I don’t think it’s a one-year blow,” he said of the labor advantage. “I think that has changed very significantly and will remain geared towards work having more bargaining power and securing higher wage growth for years to come.”

As earnings pour in and the Fed ponders its next move amid a tight labor market, equity investors have grown nervous. The S&P 500 and Nasdaq closed Wednesday at their lowest levels since 2020, while the Dow DJIA,
+2.83%
ended at its fourth-lowest close of the year, according to Dow Jones Market Data.

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