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Morgan Stanley Strategists See Threat to U.S. Profits From Wages

Published 03/30/2022, 06:56 AM
Updated 03/30/2022, 07:18 AM
© Reuters.  Morgan Stanley Strategists See Threat to U.S. Profits From Wages

© Reuters. Morgan Stanley Strategists See Threat to U.S. Profits From Wages

(Bloomberg) -- U.S. profits are likely to feel the heat from a jump in wages this year caused by a historically tight labor market, according to Morgan Stanley strategists. 

“The challenges companies face in attracting workers seems to be worsening in quarters,” strategists including Andrew Pauker and Michael Wilson wrote in a note.

Companies have so far responded by raising prices to offset higher wage costs, but that could become increasingly difficult as demand weakens across industries such as household durables and autos, they said.

After consistently lagging behind productivity growth over the past two decades, wages have rapidly caught up in the post-pandemic economic recovery. What’s more, the jump in costs is likely here to stay, rather than being a temporary squeeze as fiscal policies lead to persistently tight labor markets.

“Wage gains are not just due to the rapid recovery from the Covid-19 shock that may ease as the economy loses some steam,” said Morgan Stanley economists Julian Richers and Ellen Zentner. “Instead, higher wage growth in excess of productivity is likely to be the norm, not the exception for some time as the labor share of corporate income normalizes.”

Goldman Sachs Group Inc. strategists flagged the issue last month, saying that concerns about rising wages had dominated fourth-quarter earnings calls at S&P 500 companies. 

For Morgan Stanley strategists, a “full convergence of real wages with productivity implies that economy-wide pretax profit margins would fall to 10.7% from 17.8%.” Bloomberg Intelligence analysts expect operating margins of 16.5% in 2022.

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The Morgan Stanley strategists recommend utilities, telecoms and energy as sectors that are relatively immune to higher wages, while hotels, restaurants and leisure, retailers and healthcare providers and services are more exposed. 

Among individual stocks, investors should focus on names that still have the ability to pass on costs to consumers, that have more flexible cost structures and more durable margins.

They listed FedEx Corp (NYSE:FDX)., Dollar Tree Inc (NASDAQ:DLTR)., AutoZone Inc (NYSE:AZO). and Nordstrom Inc (NYSE:JWN) among firms “adversely exposed” to wage pressures.

©2022 Bloomberg L.P.

 

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