Job Cuts from Big Tech Signal Weaker Demand

Mega-cap technology companies continue to eliminate jobs, a sign that demand in the sector is waning. Amazon.com (AMZN) last week announced more than 18,000 job cuts, its biggest reduction ever, and Salesforce (CRM) said it would cut about 10% of its workforce. Industry tracker Layoffs.fyi estimates 18,300 tech employees have been let go this year, following the loss of 154,000 jobs in the tech sector in 2022.

Technology companies that have announced job cuts have moved higher following their announcements on some relief about lower expenses.  For example, Salesforce is up more than +10% since announcing its workforce reductions last week, and Meta Platforms (META) has surged more than +30% since it announced that it would cut more than 11,000 jobs in November.

Yet, Janus Henderson Investors said, “layoffs should be a move of last resort, so it tells us that demand is much worse than the market expects, which suggests stock multiples need to contract more.”  The job cuts may be too little and too late as share prices do not yet reflect how much of a hit profits will take as a slowdown in the economy cools the demand for technology.

According to Bloomberg Intelligence, analysts have already cut revenue growth estimates for technology companies to +2.4% for 2023 versus a consensus projection of +5.4% in October. Cuts to earnings estimates are much sharper as they are seen falling -2.2% this year, compared with the prior projection of +4.2% growth.  Janus Henderson Investors said technology stocks could see an additional -20% downside in a worst-case scenario, following last year’s -33% plunge in the Nasdaq 100 ($IUXX) (QQQ), the index’s worst year since 2008.

Some analysts see the job cuts in the technology sector as a positive trend, given that the Nasdaq 100 is up almost +3% since November.  BlackRock Financial Management said the job cuts are a good thing as “this tells you that companies are being realistic and that they have real concerns for profitability and their shareholders.”  However, Morgan Stanley said job cuts would not be enough as “tech firms are not good at cost cutting, and they will be late on that.  It will take longer than you think, and the margin degradation can be more severe in those areas.”

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