Over the past decade, the leading sector of the bull market was technology stocks. This sector drove the indices higher, and the largest companies in the sector were able to earn windfall profits and attain sky-high valuations.
Of course, this also led to a war for talent with high salaries and perks for employees. Now, the party is ending as we have entered a new era of high rates and inflation which means that the old playbook of winning market share at any cost, no longer applies. Instead, companies now have to pay attention to margins and no longer have a tailwind of steadily rising revenues as companies and consumers are cutting back on tech spending.
These reductions in the workforce are happening across the industry. Some of the most notable examples include Microsoft
It's also interesting that despite these layoffs, the overall economy continues to expand and add jobs at a reasonable pace. Further, we have yet to see a spike in the unemployment claims data which indicates that many of these laid-off workers are able to secure new jobs. And, it's also fair to note that these companies were aggressively increasing headcount over the last couple of years, that their staffs remain meaningfully higher when compared to a pre-pandemic baseline.
Still, it is shocking and sobering to see the biggest and most successful companies of this era embark on a radical change in strategy across the industry. If we look at recent earnings reports and their stock price, it's also clear that things have significantly changed. For the first time in a decade (absent the anomalous coronavirus-affected quarters), these companies are seeing revenue growth flatten and earnings decline. At the same time, investors are rewarding companies with strong cash flow.
For the tech industry, it's the first real recession since the dot-com crash in 2000. In 2022, nearly 100,000 positions were cut, while 2023 is expected to be about three times higher if early trends in January continue. Many companies have already reduced headcount by about 10%, especially among newer IPOs that are still not cash-flow positive like Coinbase
Simply put, speculative investments that may or may not deliver exceptional returns are less viable in an environment where investors can earn a risk-free return of 5% vs 0%. From a market perspective, the irony is that the equities of these companies actually are rallying on the news being announced. It's not too surprising as these stocks have underperformed for more than a year in recognition of these realities.
