3 reasons why Wall Street isn't worried about a $15 minimum wage hike, according to 3 expertsFebruary 19, 2021
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- Democrats are seeking to raise the federal minimum wage to $15 an hour as part of a $1.9 trillion stimulus package.
- Wall Street sees the proposed hike in minimum pay from $7.25 an hour facing an uphill battle in the Senate.
- Vaccinations and further fiscal stimulus are stoking prospects for double-digit earnings growth for S&P 500 companies.
- Visit the Business section of Insider for more stories.
Raising the federal minimum wage to $15 an hour is a proposal being floated as part of the $1.9 trillion stimulus package that’s headed for a vote next week in Washington. Meanwhile, the spotlight on American pay conditions landed on Walmart after the retail behemoth this week said it will raise wages for some of its workers.
But Wall Street by and large appears unconcerned about the proposed federal wage increase. Here are a few reasons why that’s the case:
Walmart can afford its pay push
Walmart said its pay raises for some workers will go into effect in March. It will, however, keep the starting rate at $11 an hour. The initiative is set to bring the pay for 425,000 associates to between $13 and $19 an hour.
The pay raises are aimed at creating a “ladder” system to help employees move up in the company, Chief Executive Doug McMillon told investors Thursday. Also, the investment is aimed at supporting a new structure that puts an emphasis on digital sales, an area that’s strengthened since the start of the COVID-19 pandemic.
“Walmart is not doing this out of altruism. They are doing it because they think it’s good business,” said Brad McMillan, chief investment officer at Commonwealth Financial Network, in a telephone interview Thursday.
“When you look at Walmart’s cost structure, they are a low-margin business by design. They are a high-staffed business by design and they can still afford to do this. Is this going to have an effect on Apple? I don’t think so.”
Walmart’s stock dropped 6.5% on Thursday after warning it expects slower revenue growth through the next fiscal year and for its profit to decline slightly.
“We acknowledge the company’s tempered guidance for FYE 2022, with some COVID-19 impact,” wrote Charlie O’Shea, vice-president at Moody’s, in a media statement. “[H]owever it is our continued view that the investments Walmart continues to make will, like the past cycle, generate increasing traction on all fronts, and are therefore prudent and sensible.”
The minimum wage proposal is unlikely to pass
Democrats are pushing for the federal minimum wage to be increased to $15 by 2025. The minimum rate has been $7.25 since 2009. President Joe Biden this week reiterated his support for the wage-hike proposal. “It’s about doing it gradually,” and stair-stepping increases, he said at a CNN Town Hall.
But Biden also has cast doubt on the proposal’s chances of success within the larger stimulus package. “I put it in, but I don’t think it’s going to survive,” he told CBS News earlier this month.
The proposal needs the support of 60 Senators, and it appears unlikely that 10 Republicans will join 50 Democrats to pass the measure.
“Forcing a $15 minimum wage into a coronavirus relief bill would do nothing but shutter the millions of small businesses already on life support and would force those that survive to lay-off employees,” said Senator Tim Scott of South Carolina, according to The Hill.
The non-partisan Congressional Budget Office in an analysis of the Democrats’ Raise the Wage Act found that the pay increase could lead to 1.4 million lost jobs, while lifting 900,000 people out of poverty.
Vaccines, cash to consumers, and earnings growth are at hand
While Washington is still wrangling over pay for American workers, some big players in Corporate America have been moving forward.
For a handful of companies, “higher minimum wage could negatively impact earnings but we have seen a trend over the last several years where a number of companies were already stepping up to raise their starting wages,” Paul Hickey, co-founder of Bespoke Investment Group, told Insider.
Amazon, Best Buy, Costco and Target have increased their starting pay to $15 an hour. Amazon exec Jay Carney earlier this year wrote a letter in support of the proposed minimum wage increase to $15.
“In general…you’re seeing companies within economic data and survey data finding qualified labor at current prices. It could be a trend down the road where we see increased labor-cost pressures,” said Hickey.
Whether or not the wage-hike proposal wins Congressional approval, companies facing labor-cost headwinds “are either going to have to increase wages or find other ways, through technology, to use less labor,” he said.
Meanwhile, the topic of the federal minimum wage proposal has barely come up during recent earnings calls.
John Butters, senior earnings analyst at FactSet, ran a search for the term “minimum wage” in the earnings-call transcripts of all the S&P 500 companies that have conducted calls from December 15 through Wednesday.
Only 10 companies have cited or used the term “minimum wage” on their calls over that period, Butters wrote in emailed comments. Rather, what has Wall Street’s attention is the likelihood of continued economic recovery from the devastating coronavirus crisis.
“By comparison, 333 S&P 500 companies have cited or used the term ‘covid’ over this same period,” Butters wrote.
More than 57 million Americans have received COVID-19 vaccinations and with millions more in line, bolstering the view that more businesses will be able to reopen and stay open.
Washington may send out $1,400 checks to millions of households if the new stimulus package is passed. This week, retail sales in January showed a jump of 5.3%, outstripping expectations of 1%. Many analysts noted the spending surge followed the December approval of a $900 billion aid package that included $600 direct payments and expanded unemployment benefits.
Economic recovery prospects have helped push stocks to record highs and drive up corporate earnings expectations. The percentage of S&P 500 companies that have issued positive first-quarter earnings guidance is 64%, running above the five-year average of 33%, according to weekly analysis from Butters at FactSet. Analysts are also anticipating double-digit earnings growth for all four quarters of 2021.
If Wall Street is concerned about the minimum-wage proposal, “it’s pretty well-hidden by other factors,” said McMillan at Commonwealth.
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