Layoffs are a nightmare for employees, but Wall Street loves them

It may seem counterintuitive for Wall Street to reward companies for letting people go. After all, layoffs are usually thought to be a sign that the business isn’t doing so hot. But plenty of these companies are posting strong profits — they’re letting go of workers as part of an effort to show investors they’re serious about cutting costs and becoming more efficient. Wall Street, in turn, has been pretty jazzed about all the talk of scaled-back workforces. Meta’s downsizing has been met with a hell yeah — the company’s stock price has increased by more than 170% over the past year. Spotify’s stock jumped by 7.5% after its layoff announcement in December and is up 30% so far in 2024. And while a lot of the layoff talk is concentrated in tech, investors were also quite pleased about job cuts at Estée Lauder.

Investors’ cheering on workforce reductions isn’t necessarily a novel phenomenon. Companies are profit-seeking endeavors, after all, and cutting labor costs is a signal to shareholders that executives are trying to increase those profits.

“Ultimately, companies want to demonstrate to all stakeholders that they’re being thoughtful stewards of capital, so arguably these kinds of actions are one way that they can show that,” said Scott Kessler, a global sector lead for technology, media, and telecommunications at Third Bridge Group.

Some factors in the recent bout of layoffs — and investor reactions — are unique. Many companies took an aggressive approach to hiring during the pandemic, particularly tech companies whose engagement boomed while everyone was stuck at home. As consumption patterns normalized and interest rates increased, riskier projects became more expensive. Companies started doubling down on what they already did well instead of investing in new projects that required more people. The cuts, many executives say, are a way of getting their head counts down to a more normal size, or a size Wall Street will feel better about.

In early February, Goldman Sachs analysts said in a report that many of the companies announcing layoffs were doing so not because their outlooks had worsened but as part of an effort to “improve company valuations by responding to investor demands to shrink workforces that were perceived to have grown too large and expensive.”

Sameer Samana, a senior global market strategist at the Wells Fargo Investment Institute, argued that “after many years of engaging in probably what I would call ‘moonshot’-type projects, whether it’s the metaverse or what have you, it seems like tech companies have finally found some fiscal discipline, and clearly a lot of it’s leading to reining in some of those moonshot projects and focusing more on the business at hand.”

“When rates were low, a lot of these projects made sense,” Samana added. “When you plug in 0%, a lot of projects have positive present value, and when you plug in 5%, a lot of those become negative.”

Ted Mortonson, a managing director at Baird, said some tech companies were downsizing in order to become a more attractive target for buyers. Essentially, cuts make firms a “leaner, meaner” opportunity for M&A — or just for weathering the high-interest-rates storm.

Then there’s the artificial intelligence of it all. Though some of the excitement around AI has died out over the past year, big companies are still chatting about it on earnings calls. The analysts I spoke with said hopes around AI were likely driving some layoffs — and investor optimism about them. Kessler said that since tech companies were trying to sell customers on “the productivity and efficiency benefits” of AI, they could reiterate that argument by using the tools in their own business and doing some “head-count rationalization” as well.

The tech companies developing AI products are the best positioned to try them out. “If you can automate and orchestrate an end-to-end solution from a compute standpoint, you just don’t need the head count,” Mortonson told me, though he added that despite all the hype, AI likely wouldn’t make a big difference in company efficiency for some time.

Wall Street hasn’t rewarded every company’s layoff announcement, especially those indicative of broader problems within the business. And while these announcements are triggering a stock-price op in the short term, the results may not stick. Research suggests layoffs are bad for stock prices over the long term and can often be a drag on business because they hurt morale and productivity and are quite expensive.

In some cases layoffs really are inevitable, but it’s hard not to feel like they should be a last resort, not a relatively simple strategy for upping profit margins and making investors happy. “Stock soars after company lays off thousands of workers” headlines should give everyone pause, especially as they proliferate.

Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.