Rising wages are the biggest threat to earnings and 'corporate misery' is correlated to higher labor costs, Bank of America says

• Analysts expect S&P 500 companies to post record margins in 2022 but spiking wages are a threat to that view, says Bank of America.
• Year-over-year wage growth through December shot up by nearly 5%.
• Rising labor costs are highly correlated to companies expressing misery, the bank said.

The steep climb in wages for workers poses a threat to margin growth for Corporate America, Bank of America said Tuesday as the fourth-quarter earnings season gets underway.

Companies have been hiking pay to compete in a market rife with labor shortages during the COVID pandemic and apparent structural changes that are seeing people shun low-paying jobs. Wage growth surged in 2021, rising by 4.7% in the twelve months through December.

Combined with supply-chain disruptions, companies' margins were squeezed last year, and Wall Street sees a drop of 100 basis points in fourth-quarter net margins to 11.8%, ex-financials.

There's broad agreement among analysts that margins are due for a rebound this year, with an expansion to a new record high by the second quarter, BofA said. But that consensus now looks shaky.

"Supply chain pressure could moderate, but a continued rise in wage costs and slowing macro conditions will likely weigh on margins. We see risk to consensus margin expectations in 2022," Savita Subramanian, head of US equity and quantitative strategy at Bank of America Global Research, said in an earnings-tracker note.

In fact, more than producer prices and commodities, wage pressure is a bigger risk to S&P 500 margins than any other input, with labor representing about 40% of total costs, the bank warned, citing the US Bureau of Economic Analysis.

BofA said its Corporate Misery Indicator that uses average hourly earnings as a negative input has been highly correlated to year-over-year earnings growth, at 66%.

The correlation "drops significantly" to 28% using the producer price index and to a reading of -46% using the Bloomberg Commodity Index.