Why stock-market bulls aren’t cheering accelerating wage growth

Why stock-market bulls aren’t cheering accelerating wage growth

Earnings growth estimates have slowed, but revenue expectations are on the rise

Stock-market investors on Friday gave a chilly reception to the February jobs report, which showed the U.S. economy adding just 20,000 jobs last month.

But many analysts and economists were quick to point out that the report was more bullish for the U.S. economy than the headline number suggested, with special attention given to rising pay for American workers, as average hourly earnings rose at their fastest rate in nearly a decade.

But what’s good for American workers isn’t necessarily good for corporations, as analysts and investors interviewed by MarketWatch warned that higher wages could contribute to an increasingly depressing picture for corporate earnings growth in 2019.

“The 3.4% year-over-year jump in wages represents a growing threat to profit margins,” emailed Alec Young, managing director of global markets research at FTSE Russell.

Analysts said the weaker-than-expected payrolls number and growing concerns over a global economic slowdown combined to sink major U.S. stock benchmarksfor a fifth straight day Friday. In early afternoon activity, the S&P 500 SPX, -0.21% was off 0.7%, while the Dow Jones Industrial Average DJIA, -0.09%  declined around 142 points, or 0.6%. Both benchmarks were on track for a weekly fall of around 2.7%.

And it’s these pressures on profit margins that are of most concern to investors today, as they have been a significant driver of rapidly shrinking earnings estimates for firms in the S&P 500 index firms. Over the past six months, estimates earnings per share forecasts have fallen 5.3%, from $176.69 per share on Sept. 7 of last year to $169.79 today, according to FactSet.

Meanwhile, revenue projections have actually ticked up by 0.2% over that same time, suggesting that analysts are more concerned about falling profit margins than they are by weakening demand.

“Profit margins are a growing concern,” Quincy Krosby, chief market strategist for Prudential Financial told MarketWatch. “That’s why the market has been concerned with accelerating wage growth. What you need to see is higher sales figures that offset these wage increases.”

An ideal scenario, Krosby added, was that higher wages bolster the American consumer, who increases his spending to such a degree that corporate sales rise above what’s now being estimates.

Absent that scenario, however, corporate profits could hit a rough patch. “There is a risk that we are set to enter an earnings recession,” Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management told MarketWatch. An earnings recession is defined as two consecutive quarters of falling year-over-year profit.

Though Slimmon believes that any dip in earnings would be short-lived, he said, “the point is the market is vulnerable in the near-term.”

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