GOLDMAN SACHS: America's largest companies are obsessed with 3 things that underscore why the rest of the year is going to be challenging

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S&P 500 companies discussed the impact of higher commodity prices.

• The three themes that stood out to Goldman Sachs equity strategists from second-quarter earnings calls were trade, margin pressures, and higher wages.
• They underscore why the operating environment for companies "will become more difficult in the second half of 2018," the strategists said.

The second half of 2018 is poised to be tougher than the first for corporate America, judging from recent commentary by executives.

Goldman Sachs' equity strategists once again compiled a roundup of the biggest themes that came up during quarterly earnings calls conducted by S&P 500 companies. Their quarterly S&P 500 Beige Book mimics the Fed's version, which compiles anecdotes from business leaders on the biggest issues they're confronting.

During second-quarter earnings calls, tariffs, higher margins, and wage growth were the three themes that stood out.

"Following another excellent S&P 500 earnings season, companies acknowledged that the operating environment will become more difficult in the second half of 2018, with trade tensions and increased margin pressure in focus," David Kostin, the chief US equity strategist, said in a note on Thursday.

Tariffs and trade

Threats on trade turned to action in the first half of 2018, with the US and China imposing tariffs on roughly $50 billion worth of each other's goods.

The overall read from Goldman Sachs' analysts is that there's no widespread pain from tariffs, especially where China is concerned.

"We have seen very little impact to no impact from the trade war on our business, with the exception, of course, of the export ban with ZTE where we lost revenue in Q3 and Q4," Liam Griffin, the CEO of semiconductor company Skyworks, said during the earnings call.

"The ban has been lifted, but it will take some time to recuperate that revenue."

But companies in some industries that rely on products that have been taxed, like steel and aluminum, have already announced layoffs and plant relocations to cope with the effect of tariffs.

For example, the iconic motorcycle maker Harley-Davidson said it was moving more production outside the US, prompting President Donald Trump to tweet his support for owners boycotting the brand.

Margin pressures

S&P 500 margins are at an all-time high, and companies expect to feel the pressure from that in the second half of the year, Kostin said.

One notable area where costs are rising is in the logistics/trucking industry. Additionally, commodity prices have increased over the past year. Steel has risen 43% compared to a year ago, lifted in part by tariffs, and aluminum is up 18%, while West Texas Intermediate crude is up 41%.

One reprieve for companies is that the economy is healthy enough for them to pass on some of these higher costs to customers without driving most of them away.

"What really matters to us is not necessarily whether commodities go up or commodities go down but do they go up and go down in balance with end demand," Adam Norwitt, the CEO of fiber optic cable-maker Amphenol said.

"And I think we are in a relatively healthy demand environment so to the extent that there are commodity increases that allows our customers, that allows us to pass on ultimately the impact of those commodity increases."

Wage inflation

During the second quarter, the headline unemployment rate fell to 3.8%, the lowest level since 2000. As the labor market tightened, some companies had to pay more to hire or retain skilled workers.

"Labor costs for the quarter were 27%, an increase of 80 basis points from the 26.2% in Q2 of last year," John Hartung, the chief financial officer at Chipotle, said. The increase from last year was driven primarily from wage inflation of about 6% and increased restaurant manager bonus cost as we returned to normalized bonus payouts, rewarding our managers for delivering strong results.

Some companies, like Packaging of America, said they were looking to use more automation as a way to keep costs low. Employing more third-party contractors and people in cheaper locations outside the US was in the works for DXC Technology.