Traders love the companies that spend the least on employee pay

In the US stock market right now, efforts to keep labour costs down are paying off.

A group of companies that spend the least on employee pay has outpaced a basket of high-labour cost stocks by 13 percentage points over the past year, according to data compiled by Goldman Sachs. That’s the biggest outperformance since early 2010.

And while it’s not entirely surprising that the market would reward companies keeping costs in check, the divergence in performance highlights a broader theme: Investors see inflation rising in the near future, and want to be positioned accordingly.

Since wage growth tends to occur as inflation inches higher, investors want to own the companies best positioned to withstand that. That means the ones already successful in keeping wage costs low.

“Wage inflation is a factor in the equity market,” a group of Goldman strategists led by David Kostin wrote in a client note. “Low labour cost firms will continue to outperform as wages rise.”

Screen Shot 2017 07 31 at 11.26.59 AMGoldman SachsFor US public companies, it’s been paying off to keep compensation costs down.

If you’re wondering which companies fit into the two categories, Goldman has kindly provided the components for both. Here’s a look at the breakdown:

  • Five companies in the High Labour Costs basket that have the highest implied labour cost as a percentage of revenue: Darden Restaurants (44%), Fiserv (41%), Automatic Data Processing (40%), CSRA (40%), Stericycle (36%)
  • Five companies in the Low Labour Costs basket that have the lowest implied labour cost as a percentage of revenue: Molson Coors Brewing (0%), Qualcomm (0%), Skyworks Solutions (0%), Host Hotels & Resorts (0%), Welltower (0%)

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