S&P 500 defies the trend and soars 32%! Goldman Sachs: Cooling labor costs become the "invisible hand" of corporate profits.

Goldman Sachs strategist said that despite a significant deterioration in the labor market, the S&P 500 index has surged 32% from the April low, currently only 5% below the forecast target of 6900 points for mid-2026. Goldman Sachs' Chief US Stock Strategist David J. Kostin said, "Since April, the S&P 500 index has hit 21 new highs, the most frequent record since 2021." This is a sharp contrast to the decrease in employment growth from 158,000 in April to only 22,000 in August, leading to an increase in the unemployment rate to 4.3%. Kostin pointed out that this clear disconnect between the stock market and labor data can be explained by multiple factors. "As long as the economic growth outlook remains stable, stocks typically benefit from falling yields," he said, adding that the weak labor data "will cement a 25 basis point rate cut at the September FOMC meeting." In addition, when the pace of price increases by businesses exceeds the growth rate of labor costs, slowing wage growth may boost corporate profit margins. Kostin stated that labor costs currently account for about 12% of overall index revenue in the S&P 500, and 14% for median stocks in the index. "We estimate that with all other conditions remaining the same, a 100 basis point change in labor cost growth will affect S&P 500 index earnings per share by 0.7%," he calculated, pointing out that small-cap stocks face greater sensitivity, with Russell 2000 index constituent companies potentially experiencing a 1.5% earnings per share impact in the same scenario. Company filings also showed that median employee compensation among S&P 500 index constituents increased by 3% year-on-year, while it increased by 4% for median stocks in the Russell 2000 index. "At the sector level, stocks in the materials sector had the largest increase in median employee compensation (+6%), while stocks in the utilities sector remained relatively flat," Kostin said, noting that the total number of employees in both indices increased by only 1% year-on-year, consistent with the "low layoffs, low hiring" labor market they described. The stock market appears to expect that the weakness in the labor market is a short-term phenomenon, with low labor cost stocks outperforming high labor cost stocks by 8 percentage points (17% vs. 8%) so far this year. Kostin believes this indicates that investors are "looking past the recent slowdown in the labor market and anticipating the gradual reacceleration of the economy by 2026." He concluded that the company's wage survey leading indicator suggests that wage growth will continue to cool, providing "incremental tailwinds for corporate profits."