(Bloomberg) — Massive job cuts in Silicon Valley are bringing some relief to investors after a year-long stock selloff, as companies indicate they’re focused on bolstering their profits heading into a key earnings reporting season.
Big US tech companies including Alphabet (NASDAQ:) and Salesforce (NYSE:) experienced, on average, a 5.6% bump in their stock price this month in the session following an announcement of job cuts, according to data compiled by Bloomberg.
“This is a decade overdue, but I am very glad to see these encouraging steps toward focusing on margins,” said Gene Munster, co-founder and managing partner at Deepwater Asset Management, who expects an additional 15% to 20% headcount reduction in Big Tech beyond what has already been announced.
Looking past the short-term pop in stock prices, the risk is that the job cuts won’t be enough to offset the drop in earnings from a weakening economy. For now, investors broadly are optimistic that that won’t be the case: The has risen 11% from its bear-market low in December, outpacing the S&P 500’s 6.2% increase.
Munster owns shares of Meta Platforms Inc (NASDAQ:), which announced layoffs last year, as well as Alphabet and Apple Inc (NASDAQ:). He said he wants to see companies give cautious outlooks when they report earnings in order to be confident that a bottom in stock prices has been put in place.
“Some companies have gotten too much credit for modest cost reductions, which means we could be due for a pullback if numbers haven’t been fully de-risked,” he said.
In the last bull market, ultra low interest rates made it easy for companies to borrow money and fuel growth at any cost. Sales surged and margins were squeezed as companies invested heavily in expanding their footprints and headcount.
Fast forward to 2022, when easy money evaporated as the Federal Reserve tightened monetary policy to control rising inflation. With the threat of a looming economic slowdown or recession, investors began clamoring for a heightened focus on maintaining profits and margins to offset weaker revenue growth. Activist investors have joined in to acquire stakes in large companies like Salesforce and Walt Disney (NYSE:), and could pressure them to cut costs.
Of the biggest technology and internet companies, which together employed more than 2.2 million people as of their last fiscal year, Apple is the only one that hasn’t announced large-scale job cuts; it instead paused hiring for many jobs outside of research and development.
“With the exception of Apple, 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,” said Yelena Maleyev, an economist at KPMG.
Analysts predict that fourth-quarter tech earnings will show the steepest drop since 2016. Microsoft Corp (NASDAQ:), which kicked off the industry’s reporting late Tuesday, said revenue growth in its Azure cloud-computing business will decelerate this quarter and warned of a further slowdown in corporate software sales. The company said last week it’s cutting 10,000 jobs.
The combination of lower costs along with durable fundamentals could set tech up for gains when the economy eventually picks up steam, according to David Waddell, CEO and chief investment strategist at Waddell & Associates.
“Cost cuts in 2023 queue up exponential profit expansions in 2024,” he said. “The more costs they cut today into a shallow recession, the more profits they earn in the subsequent expansion.”
He suggested that the market may need to consolidate its recent gains, “but there is no need to revisit the October lows.”
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