How Labor Costs Are Shaping Corporate Profits and Stock Moves – Goldman Sachs' David Kostin

S&P 500 Surpasses Expectations Despite Labor Market Weakness

The S&P 500 has experienced a significant rebound, rising by 32% since its low point in April. The index is now just 5% below the mid-2026 forecast of 6,900, despite notable challenges in the labor market. Goldman Sachs strategists have observed this trend and provided insights into the factors driving the stock market's resilience.

David J. Kostin, chief U.S. equity strategist at Goldman Sachs, highlighted that the S&P 500 has reached 21 new highs since April, marking the highest frequency of such milestones since 2021. This contrasts sharply with the declining monthly payroll growth, which dropped from 158,000 in April to only 22,000 in August, contributing to an unemployment rate of 4.3%.

This apparent disconnect between equity performance and labor data can be attributed to several key factors. According to Kostin, stocks often benefit from lower yields, especially when the outlook for economic growth remains strong. He noted that weak labor data played a crucial role in reinforcing the case for a 25 basis point interest rate cut during the September FOMC meeting.

Additionally, slower wage growth can positively impact corporate profit margins if companies are able to raise prices more quickly than labor costs increase. Labor costs currently account for approximately 12% of revenues for the aggregate S&P 500 and 14% for the median S&P 500 stock, according to Kostin.

He estimated that a 100 basis point change in labor cost growth would affect the S&P 500’s earnings per share (EPS) by 0.7%, assuming all other factors remain constant. Small-cap stocks face even greater sensitivity, with potential EPS impacts of up to 1.5% for Russell 2000 companies under similar scenarios.

Company filings also reveal that compensation for median employees increased by 3% year-over-year for the median S&P 500 stock and 4% for the median Russell 2000 stock. At the sector level, median employee pay saw the most significant increases in the materials sector, with a 6% rise, while utilities saw little change. Headcount growth remained modest, at just 1% year-over-year for both indices, reflecting a labor market characterized by low hiring and firing activity.

Equities appear to be anticipating a short-lived period of labor market weakness, with low labor cost stocks outperforming high labor cost stocks by 8 basis points year-to-date (17% vs. 8%). Kostin suggested that investors are looking beyond the current slowdown in the labor market and toward a gradual economic reacceleration in 2026.

Goldman Sachs’ Wage Survey Leading Indicator indicates continued cooling in wage growth, which could provide an incremental tailwind to corporate profits. This trend suggests that the market is positioning itself for a more favorable economic environment in the near future.

New Stocks in High and Low Labor Cost Baskets

Goldman Sachs has identified new additions to its high labor cost basket, including News Corp., AutoZone, Dollar Tree, KeyCorp, Brown & Brown, Marsh & McLennan, Moderna, Axon Enterprise, Workday, Datadog, Broadcom, Microchip Technology, Amcor, CoStar Group, and PG&E Corp.

On the other hand, the firm has also added new stocks to its low labor cost basket, such as TKO Group, Ulta Beauty, Best Buy, Apollo Global, Loews, Interactive Brokers, Expeditors, First Solar, Nvidia, Monolithic Power Systems, Microsoft, and NRG Energy.

These selections reflect the ongoing analysis of how different sectors and companies are affected by changes in labor costs and overall economic conditions. As the market continues to evolve, these insights will be critical for investors navigating the complex landscape of equities and economic indicators.