Layoffs are being mentioned on US earnings calls at the highest rate since the pandemic “- and as Meta Platforms Inc. shows, such cost cutting can pay off for investors. Efforts by the Facebook parent to slash costs and refocus its business upended the lives of thousands of workers, but has since helped propel its stock 340 per cent from a 2022 low.
With an economic soft landing being the base case for many, positioning by firms to protect margins - particularly in the technology sector - is being welcomed by investors.
Mentions of job cuts and synonyms per earnings calls this season have jumped to the highest levels since the second quarter of 2020, according to a Bloomberg transcript analysis of S&P 1500 Composite Index firms.
For the technology industry in particular, “more recent cuts come out of a position of strength,” said Wolf von Rotberg, equity strategist at Bank J. Safra Sarasin. “Confidence in the sector appears high that growth can persist even with a smaller workforce,” he said.
The prospect of a cooling job market would bolster investor hopes that the Federal Reserve may ease borrowing costs sooner rather than later. US nonfarm payrolls data due Friday are expected to show a slowdown in new jobs added to the economy.
“If you look at it from the point of view of strictly defending margins, these job cut announcements are usually well taken by markets with the stocks typically going up,” said Roland Kaloyan, strategist at Societe Generale. If the cuts stay at a moderate level, it would also encourage “the Fed to turn more dovish,” he said.
Reducing costs by cutting workforce
Salesforce Inc., Amazon.com Inc., and Alphabet Inc.’s Google are among companies reducing costs this year, while Microsoft Corp. is letting 1,900 people go across its video-game divisions following its acquisition of Activision Blizzard.
Elsewhere, Spotify Technology SA, and United Parcel Service Inc. have announced staff reductions. In the banking sector Citigroup Inc. is among firms reducing roles, while Deutsche Bank AG plans to cut 3,500 jobs over the coming years as it seeks to lift profitability and return more money to shareholders.
“This narrative of labor and staff shortages, that’s really behind us now,” said Bastien Drut, head of strategy and research at CPR AM, a unit of Amundi.
To be sure, not all cost-cutting strategies yield the kind of payoff being enjoyed by Meta and Amazon. While layoffs by retailer Wayfair Inc. and eBay Inc. were greeted positively by investors who recognised efforts to preserve margins in a tougher economic environment, office supply firm Xerox Holdings Corp. or Transformers toymaker Hasbro Inc., saw less success in such moves shoring up stock prices.
Some companies also have less fat to lose following significant cuts last year, while higher valuations limit room for upside. US equities hit fresh records last month in a surge at odds with a slowdown in job openings.
Stock gains could also be vulnerable if an economic deterioration leads to greater weakening in the jobs market. “When these announcements add up, that can also be the sign that the cycle is tilting towards a recession,” Societe Generale’s Kaloyan said.
Tech industry tracker Layoffs.fyi estimates more than 30,000 employees have been let go this year so far. Still, that is a far cry from the nearly 90,000 laid off in January 2023.
For Saxo Bank’s Peter Garnry, last year’s cuts mean that “technology companies delivered both rising growth rates and expanding profit margins “- the nirvana for shareholders.”
