In 2023, the stock market had a strong year and gained about 24% despite lingering uncertainty about the economy, interest rates and inflation. But recent news including significant tech layoffs are starting to put a bit of tarnish on this rally.
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Technology companies are certainly not alone, as evidenced by package delivery giant United Parcel Service Inc. (ticker: UPS) announcing some 12,000 layoffs to start 2024. But tech stocks were some of the top performers last year, which makes the cutbacks in the sector particularly disturbing.
And as high-profile companies have made some significant job cuts, many investors are worried about what it means for their stock investments — and if these layoffs are a sign of a looming recession.
— Tech layoffs are not a recent trend.
— Are tech layoffs a sign of concern or celebration?
— How to trade recent tech layoffs.
Tech Layoffs Are Not a Recent Trend
First things first: The most recent jobs report in January came in better than expected, with U.S. employers adding 353,000 jobs. So from a big-picture perspective, the labor market seems healthy.
But the unfortunate reality for those who haven’t been paying attention to technology companies is that 2023 was an absolutely brutal year for layoffs. Firms in the sector let go more than 260,000 workers during the year, according to layoff tracker Layoffs.fyi. This year, the pace seems brisk again, with more than 30,000 workers in the sector laid off since Jan. 1. If that pace keeps up we will top 300,000 tech layoffs by the end of 2024.
There are the typical startup horror stories, like short-term rental portal Frontdoor laying off all 200 of its employees after its latest funding round fell through. But it’s also the big guys doing the cutting, including:
— Microsoft Corp. (MSFT) laid off about 1,900 workers that were made redundant after the megamerger of its Xbox division with Activision Blizzard.
— Google parent Alphabet Inc. (GOOG, GOOGL) laid off more than a thousand workers in January — and its CEO warned that this may only be the beginning.
— Iconic business-focused software giant Salesforce Inc. (CRM) axed 700 workers in January.
Are Tech Layoffs a Sign of Concern or Celebration?
The loss of all these jobs may sound concerning to workers. But the brutal reality of investing is that you have to take a dispassionate look at the company’s sales and profits — not its head count.
Consider that, in one of the most high-profile moves, Facebook parent Meta Platforms Inc. (META) announced in March 2023 it would undergo its first-ever major layoff and slash roughly 11,000 jobs. In its recent earnings report in February, operations began to reflect those decisions and META stock surged 20% on improved profitability and better-than-expected guidance. That’s in part because it had fewer employees on the payroll. Further, Meta also doled out its first-ever dividend thanks to more cash on the books to prove it’s committed to sharing its better profitability with Wall Street.
While layoffs are always bad for workers and their paychecks, this is proof that sometimes the cash that’s saved gets reallocated to the bottom line to please investors and Wall Street.
Further, it’s hard to argue that tech layoffs impacting social media programmers or AI researchers provides insight into the broader economic health of the U.S. Widespread layoffs at firms like UPS would indeed be cause for concern, because they would hint that consumers and businesses are shipping (and therefore buying) less.
It’s important to understand the context of tech layoffs before you start throwing around the “R” word (i.e., recession) and jumping to conclusions.
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How to Trade Recent Tech Layoffs
As with so many things in investing, the devil is in the details. For instance, the narrative around Facebook parent Meta has been a bit negative for the last year or two, thanks to strategic missteps, and Wall Street clearly thinks its recent restructuring is a way to get things back on track — and the recent earnings numbers seem to back that up. The same can be said for companies that embarked on cost-cutting efforts several months ago.
However, it’s impossible for more recent layoffs — particularly those in January — to be reflected in any new profit reports or corporate structure. That’s particularly true in the case of Microsoft and its roughly $68.7 billion acquisition of Activision Blizzard that was only recently finalized in October.
Time will tell whether these moves are indeed good for the long-term health of a company, or stopgap solutions that are penny-wise but pound-foolish. That means investors must look beyond the current round of tech sector earnings to see if year-over-year comparisons continue to improve, or if the savings from tech layoffs have been reinvested in other efforts to drive shareholder value.
It’s also important to see how the Silicon Valley workforce responds. There’s nothing wrong with a company taking stock of its operations and right-sizing head count based on a long-term strategy, but tech companies run a real risk of undercutting morale or losing top talent if they are seen to prioritize profits over people. Consumers have power, too, as evidenced by the extreme displeasure around X — formerly known as Twitter — after CEO Elon Musk made big changes and many users abandoned the platform as a result.
Only time will tell whether tech sector layoffs are part of the regular “creative destruction” that some expect from Silicon Valley, or just a short-term money grab. That means it’s on investors to keep doing their homework.
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2024 Layoffs: How They Affect Stock Prices originally appeared on usnews.com
