Goldman has some cold analysis on jobs vs profits

An employee works in the foundry area of Trumbull Metal Specialties in Niles, Ohio.
Ty Wright | Bloomberg | Getty Images

It may feel a bit wrong but Goldman Sachs says investors should worry about a stronger jobs market. The firm recently told clients that today's "healthy labor market" will drive wages higher and so investors should avoid shares of industrial and consumer companies as those costs eat away at their margins.

"Tightening labor market and peak margins pose risk to profits," Goldman Sachs' strategist Ben Snider wrote in a note to clients Tuesday. "Sectors with the highest estimated labor costs typically underperform during periods of rising wages."

The strategist states how wages in the last five years grew at an annual rate of 2 percent, which was the "slowest pace in at least 50 years" and below the long-term average of 3 percent. Snider believes the stronger jobs market will spur wages to go higher and back to historical trends, and hurt corporate earnings.

Goldman Sachs' 2015 figure for U.S. labor costs as percentage of earnings is 9.8 percent versus 9.1 percent in 2014. The firm expects the number to rise to 10.3 percent in 2016. Each 1 percent increase in labor cost inflation negatively impacts S&P 500 earnings by 0.7 percent, according to Snider.

Already many companies are raising wages "in order to hire more competitively." Costco, Wal-Mart and Target all announced higher starting salaries in the past 12 months, the strategist notes.

Moreover, the trend toward new minimum wage increases across the country is leading to higher labor costs. Fifteen states have passed minimum wage increases starting in 2016 with an average rise of 8 percent, according to Goldman Sachs. Two of the largest states, California and New York, plan to raise their minimum wage to $15 in a few years.

To be sure, many investors would argue higher wages will spur higher consumer spending, counterbalancing any increase in costs for companies. But Goldman doesn't see it that way, especially for some industries.

Snider calls out the consumer discretionary and industrial sectors as the most at risk due to high labor intensity and potential profit margin pressure. To help investors, the strategist aggregated a list of companies with high labor costs.

Here are 10 stocks in Goldman's "high labor cost" basket investors may want to avoid.