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Expect job-market strength to hold despite labor costs pinching company earnings


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

While the days of blockbuster post-pandemic earnings might be over, arguments in favor of businesses clinging to employees also have begun to surface, given the continued tight labor market and the struggle in recent years to find workers to fill vacant spots.

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

But if higher labor costs can’t entirely be ignored, “I think the first salvo will be to cut back on open positions, as companies tighten the belt a bit,” Mullarkey said.

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

Of the 20 companies in the S&P 500 index

that reported third-quarter results through Oct. 6, 13 cited labor costs as a negative factor impacting earnings, revenues or profit margins, or as having an expected toll in the future, according to John Butters, a senior earnings analyst at FactSet.

Analysts have grown pessimistic about earnings as the Federal Reserve has sharply raised rates to battle high inflation, but S&P 500 companies still were expected to report earnings growth of 2.4% in the third quarter on a year-over-year basis, according to FactSet. That figure would be the lowest earnings growth in two years.

A fuller picture of how earnings could shake emerged on Friday when major banks JPMorgan Chase & Co
Morgan Stanley
Wells Fargo & Co.

and Citigroup Inc.

reported their third-quarter results.

Many large banks already announced cuts in mortgage lending and related businesses as the roaring housing market dramatically slowed with the surge in mortgage rates.

Staff cuts and hiring freezes also hit Meta Platforms

and others in the once-booming technology sector.

Read: From Great Resignation to Forced Resignation: Tech companies are shifting to layoffs after a huge ramp up in hiring

Even with the pain of higher rates

hitting the economy, Fed Vice Chair Lael Brainard in a speech on Monday said that “there is ample room from margin recompression,” including at retailers and especially at car dealerships, where margins climbed during the pandemic by more than 180%, or 10 times the rise in average hourly earnings in the sector.

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

Wage increase must ‘come from somewhere’

Supply-chain woes and a strong dollar

also ranked high as concerns in the early batch of quarterly earnings calls, according to FactSet. But it has been wage pressures climbing at the fastest pace since the 1980s and a low 3.5% unemployment rate that really worry top executives and Fed officials.

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

Instead of layoffs, Ma sees the risk of companies losing employees to competitors as still running high, particularly in a remote-work setting and in a tight labor market that makes fears of a recession feel remote for many workers.

While not all speculative sectors will be immune to further layoffs, he sees companies that are the “nuts and bolts” of the economy as wanting to avoid having to scramble again to find workers at even higher wages in six to 12 months.

To that end, Ma talked of a sharp shift in the balance of power that previously favored corporations over labor, since at least the global financial crisis a decade-plus ago.

“I don’t think this is a one-year blip,” he said of labor’s advantage. “I think it’s shifted in a very meaningful way, and will stay tilted toward labor having more bargaining power and securing higher wage growth for years to come.”

As earnings roll in and the Fed weighs its next move in a tight job market, stock investors have gotten jittery. The S&P 500 closed the week down 1.6%, while the Nasdaq finished down 3.1% to end at its lowest level since July 2020, according to Dow Jones Market Data. The Dow

booked a 1.2% weekly gain.


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