- Morgan Stanley says labor markets could remain tight for years, continually pushing wages up.
- Right now, companies are worried about the impact this will have on their profits.
- The company has named 10 stocks that are under minimal wage pressure, which will help margins and performance.
Amazon has its first unionized warehouse, and it’s just the latest sign of many that labor power is on the rise.
This week, Morgan Stanley released a report which found that workers kept a steady share of corporate profits for years until the turn of the millennium. At that time, its share fell precipitously thanks in part to declining unionization and falling real minimum wages. But the tide turned around 2014 and 2015.
Morgan Stanley says workers are now starting to take a bigger share of corporate profits, a trend that has only accelerated after the pandemic. And if companies retain a much larger share of profits than before 2000, the shift in favor of workers could continue for a long time due to labor shortages and low population growth.
“The record pace of economic recovery has been accompanied by very rapid wage growth. If we are correct, monetary and fiscal policy will now create persistently tight labor markets, which means that the growth in wages – and therefore labor’s share of income – is strong,” wrote a group including economist Julian Richers, chief investment officer Mike Wilson and chief U.S. economist Ellen Zentner. .
This has broad implications for the economy and stock markets. One outcome that matters a lot to investors is that this will put pressure on corporate profit margins.
“In our top-down economic model, full convergence of real wages with productivity implies that the economy-wide pre-tax profit margin declines to 10.7% from 17.8% today,” wrote L. Morgan Stanley team. If this happens within the next five years, pre-tax profits would return to their 1990s average.
Businesses are very concerned about rising wages and other rising costs – many of which affect profit margins more immediately than higher wages. Morgan Stanley says companies have raised prices to keep margins strong, but in a time of rapid inflation that strategy may not work much longer.
“Price increases to offset rising wages may soon run out of steam as demand destruction emerges in consumer end markets, including household durable goods, automobiles and homes,” the company wrote.
With fewer tools available to companies, it could be important for investors to find companies that are less vulnerable to the effects that rising prices could have on their profit margins and earnings. Morgan Stanley analysts have concluded that the following 10 companies have particularly low levels of payroll risk.
The reasons why these stocks are relatively protected vary depending on the companies’ business models and the sectors in which they operate. The companies are ranked below from lowest to highest based on their upside potential against Morgan Stanley’s price targets.
These higher figures were calculated based on Thursday’s closing prices. At that time, nine of the 10 stocks were up double digits.