Tech layoffs are nothing new, but the numbers reported at some of the world’s largest tech companies have been staggering.
To put it bluntly: layoffs are not good news for investors. From Apple to Google to Spotify to Microsoft to Amazon and beyond, many of the world’s largest companies are cutting jobs—and it isn’t pretty.
The fact that tech layoffs are a brutal reality of life in today’s tech-driven world; they’re huge headline news. And when they happen, they can affect your investment portfolios in ways you might not expect. And for investors who invested in the stock market of these companies, it signals it might impact the value of their investment in the long run.
The trend of cutting employees continued into the new year as tech companies laid off more workers over time. According to a report, Spotify announced that it had laid off 60 employees, a 6% reduction in the company’s workforce base. In an internal memo, the CEO Daniel Ek reinstated ‘he had been too ambitious in investing ahead of revenue growth.’
It was a big blow for the company, struggling to turn its business around after spending heavily on expansions and acquisitions. So why are tech companies laying off their employees? Is this a signal identifying a recession? How can these layoffs impact the stock market or your portfolio? And why should you care? You’ll find out everything in this all-in-one guide.
Why Are Tech Companies Laying off Employees?
Tech companies are facing a lot of pressure right now. Though, the reasons why they are laying off employees vary. But in the end, it’s all about improving the bottom line.
The general reasons include the following:
- Uncertainty About the Economy
Tech companies have laid off significant numbers of employees in the past years. However, this time around, it’s a bit different. The uncertainty about the economy weighs on their minds, and they are trying to figure out how many people they need to survive.
Still, many economists believe that the recession in the U.S. is likely to continue this year, 2023, and investors are aware of what impact this might have on technology companies. According to Barclays Capital Inc., the global economy in 2023 will be one of its worst in decades.
The U.S. has yet to rescind its decision to continue tightening its monetary policy. This is expected to cause a further slowdown in the global economy, which will have implications across many sectors. In an effort to mitigate losses, tech companies must downsize.
- Pressure From Investors
The tech industry is highly dependent on investors, who are usually the first to notice when things aren’t going as planned. In many cases, companies must often deliver high returns to maintain their share price. When this doesn’t happen as expected, investors sell off their shares, causing a downturn in stock prices.
According to CNBC, shares of Amazon tumbled sharply in the year 2022 amid a broader tech sell-off tied to soaring inflation, a worsening economy, and rising interest rates. As such, most investors in tech companies have begun voicing concerns over headcount reduction to curb costs and to avoid spending more than it’s bringing in.
- Post-Covid Reality
In an effort to adapt to the pandemic lockdown, many businesses turned to their employees, asking them to work from home and remotely. Companies began investing in technology and making other speculative investments that would allow them to work with remote workers without compromising quality or efficiency.
However, this change has proven difficult for many tech companies because people have returned to doing business the old-fashioned way. People are returning to the physical world and abandoning their virtual lives. Tech companies now face the fact that their hiring boom has left them with more employees than they need.
- Low Revenue Returns
Many companies are reporting lower revenue and profits than they had expected. This is especially true in the tech sector, where profits are often tied to the number of people companies employ. Without enough customers to keep those employees busy, companies find themselves in a bind to make up for their losses.
For example, Alphabet, Google’s parent company, reported weaker-than-expected earnings and revenue for Q3 of 2022. According to CNBC, the drop in share price caused by this announcement was significant—about 7%. That’s a massive loss for any company, let alone one that is still trying to establish itself as an industry leader.
How Will Tech Layoffs Affect the Stock Market?
Tech layoffs will affect the stock market in several ways. These include:
- Decreased Demand for Tech Stocks
In the short term, there will be a decrease in demand for tech stocks. Investors are likely to be wary of buying into tech companies as their value is seen as unstable or at risk of falling further. Companies that have already laid off employees will be less profitable than before and won’t be as attractive as value or growth stocks in the eyes of investors.
This layoff often sends shockwaves through the industry. In addition, investors will begin to worry and rush to sell their shares before the worst happens.
- Demand for Stocks Increases in Other Sectors
When tech companies lay off employees, it signals a reduction in the demand for the stocks of those companies. This will make other sectors to become more attractive investments. Investors may start looking at agriculture stocks and healthcare companies that are likely to be hiring to keep up with the demand for their products.
It’s often true that when one sector is struggling, investors will turn to other industries for better returns. This can increase demand for stocks across a variety of industries.
- Investors Lose Confidence
Investors’ confidence in a company is critical to its success in that company. When investors lose belief in a company, they’re less likely to invest in that company’s stock and more likely to sell their shares. If many investors sell their shares, this can lead to a massive drop in the company’s share price.
This happened when Meta’s stock price plummeted in 2022; the value of the company’s stock decreased by 64.41%. The company’s poor performance was another reason to lay off thousands of its workers.
- Stocks Prices Will Be Overvalued Elsewhere
If tech companies lay off thousands of workers, investors may be tempted to invest in other industries. As investors divert to other sectors to invest, their stock prices will become overvalued. This can lead to a bubble in the stock market as investors overpay for shares in companies they relatively don’t understand.
The bubble will eventually burst, causing the share price of these companies to drop sharply. Because of this volatility, the stock market will likely experience ups and downs, affecting other sectors.
- A Reduction in Innovation
The most obvious way that tech layoffs affect the stock market is through a reduction in innovation. When companies are forced to lay off employees, they can no longer afford to invest in research and development. This means they will either have to cut back on the number of new products they release or stop altogether.
Recently, Google, to cut costs, discontinued its next Pixelbook project and laid off the team working on it. The move to dissolve the team will delay the company in releasing new products on time; meanwhile, it could have been a big blow for investors in the stock market.
Why Should You Care As an Investor?
If you’re an investor, the best thing to do is to keep an eye on the company’s financial statements and watch out for investing trend reports. When companies cut back on spending and lay off employees, it can signify they are struggling financially or have lost faith in their business model. If you notice trends like this happening across many companies in your portfolio, it might be time to sell some of your shares.
But investors who do not have any of their portfolios spread across these stocks are unlikely to be affected by these cuts. This will be a warning sign for investors to watch, but not something that will directly affect their portfolios. In addition, it will be an ideal opportunity to invest in these struggling stocks when their prices are low, with the expectation that the companies will recover in the future.
