Some investors fear that more U.S. jobs could spell the end of corporate profits and recent remarkable equity rallies, noted Citigroup Inc. (NYSE:C) in a research note on Tuesday.
In other words, the interests of equity investors and working Americans may be misaligned, if some Wall Street sentiment is anything to go by.
But: “An improved employment environment does not mean the end of profitability,” reassures Citi’s Tobias Levkovich in his note. Historically speaking, jobs and earnings growth have moved in tandem, with more jobs sprouting alongside better earnings, he said.
“While many perceive jobs and accompanying wages as pressuring margins and earnings, the opposite seems to be the case,” he wrote.
The argument from the fearful, though, is: declining unemployment will mean less Federal Reserve stimulus, which will depress liquidity and suck money out of assets and equity markets. Additionally, a tighter labor market could cause higher wages, dampening earnings even if workers spend more in the national economy.
“Fund managers appear to fear that a tighter labor market will cause wages to rise, thereby hurting earnings progress,” reads the Citi note.
Those misplaced fears might be put to bed with the chart which Levkovich provides, outlining the correlation between nonfarm payroll figures and yearly earnings swings.