Real wages growth is higher than it’s been in years. Higher real wages should lead to more consumption and higher investment, and, without too much extrapolation, it follows that such actions should result in higher revenues and valuations. But do they? And how does that relate to earnings? Do increased wage pressures weigh on the bottom line? In this week’s post, I look at the historical relationship between real Average Hourly Earnings and some fundamental equity metrics.

The charts below compare the Z-score of real wage growth (I’m using Average Hourly Earnings for Production and Non-Supervisory Workers less Core Personal Consumption Expenditures Price Index) to S&P 500 revenues, earnings, and valuation.

First, let’s look at revenues. Despite a weak positive correlation over the entire period, the relationship has varied greatly. Note the most obvious breakdowns during recessions in the chart below. Moreover, the relationship changes quite a bit depending on the measure of inflation used. I would be wary of drawing any conclusions about revenues based on this series of wage data.


When it comes to earnings, there’s been a somewhat negative relationship. In the chart below, I’ve inverted the y-axis on the earnings data to more clearly show the correlation.


Valuation appears to have had the strongest link to changes in real wages. The two have been positively correlated, with only the period from 2006-2008 raising some questions.


On the whole, it looks like a toss-up for the impact on the S&P 500. I’ve inverted the y-axis again (this time on S&P prices) below. The relationship has been pretty negative since 2000 but was decidedly positive for much of the 1990s.


The bearing on stock prices may be uncertain, but there is still good information to take away. In the short-term, rising wage pressures have outweighed any concurrent growth in consumer spending and had a negative impact on earnings. At the same time, perhaps due to increased discretionary income and changes in inflation and growth expectations, equities have gotten more expensive with rising pay.

Rising wages are good for consumers. We’ll see how they play out for the markets.

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