Two hidden problems with the recent mega-cap tech layoffs
Disclaimer: I have never worked in investment banking in any capacity, and the following ideas are merely my speculations
Current Macroeconomic and Technical Context
Inflation and interest rate hikes cooling down are common knowledge. As such, the market has become more bullish over the past weeks, creating rounded support and strong support on the NASDAQ around the 0.618 Fibonacci retracement level. There have also been rallies across tech companies, like meta, unity, grab, and para from their lows. However, now the NASDAQ has formed a descending triangle and so it remains possible that there will be a sharp breakdown through support.
Why mega-cap tech rallied off layoffs
Massive layoffs have occurred in mega-capitalization tech firms in recent months to respond to the current recessionary economic environment, with firms like Google, Microsoft, Amazon, and other tech companies laying off more than 70,000 employees in the last year. Under the typical theory of firm economics, this is efficient behavior for the firm, decreasing variable costs to respond to reduced demand for products, thereby increasing profits for shareholders.
Problems which some have not considered
There are two important problems with the layoffs, which are summarized as:
Firstly, unlike in a factory, or place where a smaller of employees is a feasible solution to cutting costs, these technology companies are not small and are instead mega-capitalization companies, they have thousands of employees working on projects and addressing security issues. Logically, the remaining employees can't easily take over the role of the thousands of fired employees, so there will be less work done to maintain the systems, and the big projects which fired employees were working on are likely to be abandoned or take a long transition time, meaning there will be a slower rate of growth for tech companies. This issue of losing valuable employees was shown most clearly with Twitter, which almost immediately started losing functionality after it had layoffs, and even needed to rehire employees.
Secondly, it is well-known that the retail investors who put their money in stocks are mostly individuals with high salaries, since they have the money to put into stocks without worrying about expenses in the short term. It is also well known that tech employees in the USA have an incredibly high average salary, averaging above six figures in 2021, according to SHRM. For these tech investors, who are now no longer employed, many of whom are living in costly areas of the United States like Washington, California, or New York, they no longer have the income to put into purchasing stocks, and rather they may have to sell off their shares to cover their high costs of living. In other words, tech layoffs are likely to cause a significant drag on the stock market in the coming months caused by a decrease in income investment and increased selling pressure.
Current Macroeconomic and Technical Context
Inflation and interest rate hikes cooling down are common knowledge. As such, the market has become more bullish over the past weeks, creating rounded support and strong support on the NASDAQ around the 0.618 Fibonacci retracement level. There have also been rallies across tech companies, like meta, unity, grab, and para from their lows. However, now the NASDAQ has formed a descending triangle and so it remains possible that there will be a sharp breakdown through support.
Why mega-cap tech rallied off layoffs
Massive layoffs have occurred in mega-capitalization tech firms in recent months to respond to the current recessionary economic environment, with firms like Google, Microsoft, Amazon, and other tech companies laying off more than 70,000 employees in the last year. Under the typical theory of firm economics, this is efficient behavior for the firm, decreasing variable costs to respond to reduced demand for products, thereby increasing profits for shareholders.
Problems which some have not considered
There are two important problems with the layoffs, which are summarized as:
- Firing tech employees results in unfinished projects and unpatched bugs
- Former employees may need to sell their shares to cover living expenses
Firstly, unlike in a factory, or place where a smaller of employees is a feasible solution to cutting costs, these technology companies are not small and are instead mega-capitalization companies, they have thousands of employees working on projects and addressing security issues. Logically, the remaining employees can't easily take over the role of the thousands of fired employees, so there will be less work done to maintain the systems, and the big projects which fired employees were working on are likely to be abandoned or take a long transition time, meaning there will be a slower rate of growth for tech companies. This issue of losing valuable employees was shown most clearly with Twitter, which almost immediately started losing functionality after it had layoffs, and even needed to rehire employees.
Secondly, it is well-known that the retail investors who put their money in stocks are mostly individuals with high salaries, since they have the money to put into stocks without worrying about expenses in the short term. It is also well known that tech employees in the USA have an incredibly high average salary, averaging above six figures in 2021, according to SHRM. For these tech investors, who are now no longer employed, many of whom are living in costly areas of the United States like Washington, California, or New York, they no longer have the income to put into purchasing stocks, and rather they may have to sell off their shares to cover their high costs of living. In other words, tech layoffs are likely to cause a significant drag on the stock market in the coming months caused by a decrease in income investment and increased selling pressure.
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