S&P 500 soars 32% against the trend! Goldman Sachs: Cooling labor costs become the "invisible driver" of corporate profits

According to the Zhitong Finance APP, Goldman Sachs strategists have stated that despite a significant deterioration in the labor market, the S&P 500 index has soared 32% since its low in April and is currently only 5% below the forecast target of 6,900 points for mid-2026.

David J. Kostin, Chief U.S. Equity Strategist at Goldman Sachs, stated, "Since April, the S&P 500 index has set 21 new highs, the most frequent record since 2021." This sharply contrasts with employment growth, which plummeted from 158,000 in April to just 22,000 in August, pushing the unemployment rate up to 4.3%.

Kostin pointed out that this apparent disconnect between the stock market and labor data can be explained by several factors.

"As long as the economic growth outlook remains solid, stocks typically benefit from declining yields," he said, adding that weak labor data "cements the case for a 25 basis point rate cut at the September FOMC meeting." Furthermore, when the pace of price increases by companies outstrips the growth rate of labor costs, a slowdown in wage growth may enhance corporate profit margins.

Kostin noted that labor costs currently account for about 12% of the S&P 500 composite index's revenue and 14% for the median S&P 500 constituent.

"We estimate that, all else being equal, a 100 basis point change in labor cost growth would affect the S&P 500 index's earnings per share by 0.7%," he calculated, while also noting that small-cap stocks face greater sensitivity, with Russell 2000 index constituents potentially impacted by 1.5% in earnings per share under the same scenario.

Company filings also show that median employee compensation for S&P 500 constituents increased by 3% year-on-year, while median compensation for Russell 2000 index constituents grew by 4%. "At the sector level, the median stock in the materials sector saw the largest increase in employee compensation (+6%), while the median stock in the utilities sector remained relatively flat," Kostin stated, adding that the total number of employees in both indices grew only 1% year-on-year, consistent with what they describe as a "low layoff, low hiring labor market."

The stock market seems to expect that the weakness in the labor market is only a short-term phenomenon, as low labor cost stocks have outperformed high labor cost stocks by 8 percentage points this year (17% vs. 8%). Kostin believes this indicates that investors are "looking through the recent slowdown in the labor market to the prospect of a gradual economic re-acceleration by 2026."

He concluded that the company's wage survey leading indicators suggest that wage growth will continue to cool, which should provide "incremental tailwinds" for corporate profits