Big-Tech Layoffs Spark Rallies Even as Economy Slows

Big U.S. tech companies that have announced job cuts this month have experienced an average +5.6% jump in their stock price in the session following the job-cut announcement. The massive job cuts by these big tech companies demonstrate that they are trying to rein in costs and boost profits even as the economy slows.

The Nasdaq 100 Stock Index ($IUXX) (QQQ) has climbed +11% from its 3-month low in December, outpacing the +6.2% increase in the S&P 500 ($SPX) (SPY).  The risk for the technology sector is that current job cuts won’t be enough to offset the drop in earnings from a weakening economy.  Deepwater Asset Management said they expect an additional 15% to 20% in job cuts in big tech companies beyond what has already been announced.

Mega-cap technology stocks moved significantly higher in the last bull market as ultra-low interest rates made it easy for companies to borrow money and fuel growth at any cost.  As a result, sales surged, and margins were squeezed as the tech companies invested heavily and expanded their payrolls.  However, easy money evaporated last year as the Federal Reserve tightened monetary policy to control inflation.  That spurred a slowdown in demand that prompted companies to lay off workers to maintain profits and margins that were under threat from weaker revenue growth.

KPMG said, “with the exception of Apple (AAPL), which didn’t over-hire, a lot of big tech companies bit off more than they could chew, and right now they’re in the process of reversing their frothy years” and cutting payrolls.  Also, activist investors recently acquired stakes in large companies like Salesforce (CRM) and Walt Disney (DIS), which could pressure them to cut headcounts and reduce costs.

Waddell & Associates says the combination of lower costs and durable fundamentals could set big tech companies up for gains when the economy eventually recovers.  “Cost cuts in 2023 queue up exponential expansion in 2024, and the more costs they cut today into a shallow recession, the more profits they earn in the subsequent expansion.” 

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