Monday, 7 December 2015

Tighter US labour market may put pressure on corporate margins

The strong US employment report last Friday sent stocks surging but Citigroup may have a different perspective.

From Zerohedge:

First it was Goldman, then JPM, then Credit Suisse, and now it is Citi's turn to turn decidedly downbeat on stocks for next year and just cut its weighing on global equities to neutral. The main reason for Citi's bearishness...: margin sustainability, and rather the dramatic drop in corporate profits in recent months.

Quoting Citi:

Corporate profits as a share of GDP have been at all-time highs, which is just another way of saying the rewards to labour have been at all-time lows. But change may be afoot in the form of modest labour market tightening in the US... Modest nominal wage acceleration combined with global disinflation (price taking by US firms) and lack of productivity growth may mean margins come under pressure from labour costs...

Given the surge back towards the all-time highs in the S&P 500, we think that the best might be over for US equities and that indices might range trade more in 2016. We have downgraded US equities to neutral. This takes our overall equity weighting down to neutral, in many respects an extension of what we’ve been doing for most of this year as richer and richer asset markets, against a global background of economic risks, have made us more cautious.

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