These 23 companies can benefit most as raises become rarer, Goldman Sachs says

• The Federal Reserve's interest rate decision suggests that inflation isn't a big issue.   
• Lower inflation should translate to weaker wage growth, according to Goldman Sachs. 
• Here are 23 companies that can benefit most from lower labor costs.

Inflation is no longer the Federal Reserve's main enemy, as evidenced by its decision to prioritize the cooling labor market as it cut interest rates by half a point last week.

Slower price growth is welcome news for consumers who became financially pinched after the pandemic-era stimulus wore off, but workers shouldn't breathe a sigh of relief just yet.

As inflation recedes, so too should wage inflation — better known as raises.

Wage growth is down from 6% in August 2022 to 3.9%, according to Goldman Sachs. The firm's strategists, led by Chief US Equity Strategist David Kostin, recently wrote in a note that this deceleration "reflects the loosening of the labor market indicated by both macro and micro data."

Employees don't have as much leverage as they did a few years ago since there are no longer widespread labor shortages — and because the job market has softened. Still, Goldman Sachs thinks the US unemployment rate will drift down to 4% in 2025, which would be a healthy figure.

Almost no corporate management teams are talking about challenges in hiring workers, which is a marked departure from a few years ago when that was all the buzz. If companies can hire workers easier, that suggests there's more competition for workers, which could drive down salaries. An influx of immigrants may have affected this trend, Goldman Sachs economists say.

"Our economists estimate that the gap between the number of job openings and unemployed workers is now slightly below the level consistent with 2% inflation," Kostin wrote.

A so-called wage-price spiral occurs when higher prices lead employees to demand better pay, which causes companies to hike prices, thereby perpetuating the cycle. But when price appreciation fades, firms will likely no longer be as sympathetic to workers' requests for raises.

That may be especially true if firms are cutting back on hiring altogether. The US added 142,000 jobs last month, which was up from July's shockingly low figure, but still down significantly from 256,000 at the start of the year, Kostin noted.

23 companies that will benefit most from lower labor costs

Goldman Sachs researchers recently found that the typical company in the S&P 500 allocates about 14% of its revenue toward labor costs. This estimate, which was similar to levels in the three prior years, is based on firms' revenue and how their median employee is compensated.

Labor costs rose 7% in 2023 for S&P 500 companies and 5% for firms in the Russell 2000, Goldman found. Wage growth was highest in the utilities sector (16%) and only 2% in the communication services sector.

Softer wage growth helps companies improve their profit margins, which are currently near or above their 30-year averages for large-cap firms across sectors, according to Goldman Sachs. The firm believes that will be a tailwind for earnings and margins again in 2025.

"Investors are confident that wage pressures on company earnings will continue to subside," Kostin wrote.

However, lower labor costs benefit some companies more than others, based on what percentage of their revenue goes toward paying their workers, plus their revenue and margins.

Goldman Sachs shared a sector-neutral list of 50 stocks in the S&P 500 that have high labor costs, which should disproportionately benefit as wage inflation slows as raises become rarer. Companies on this list, which have outperformed lately, allocate roughly a third of their revenue to labor costs, on average, and are expected to grow sales by 6% and earnings by 12% in 2025.

Below are the 23 stocks that will benefit most from lower wage growth since over a third of their revenue went toward labor costs in 2023. Along with each is its ticker, market capitalization, price-to-earnings (P/E) ratio, sector, and labor costs as a percentage of revenue.