RBC Analysts ‘A Little Spooked’ by the Spike in Tech Layoffs

Analysts at RBC Capital Markets have expressed rising concerns about the labor market, particularly within the technology sector, according to a note released on Monday.

Although overall layoffs are currently below historical highs, the recent uptick in layoffs among tech companies has attracted significant attention. The analysts noted that while these layoffs were not as severe as those experienced in late 2022 and early 2023, they still align with some of the most substantial increases the technology industry has encountered over time.

This situation emerges against a backdrop of softening labor market trends, evidenced by payroll numbers falling short of expectations in recent months. RBC interprets this broader trend to suggest a labor market that is still normalizing rather than one experiencing a full-on contraction.

Nonetheless, the recent spike in tech-related layoffs is raising alarms, particularly for investors in the sector and the wider stock market. The analysts underscore that an increase in layoffs could have broader implications, affecting investor sentiment and potentially leading to shifts in market dynamics.

Given that tech companies have been pivotal in market leadership in recent years, any turmoil within this sector could lead to increased volatility and influence wider market rotations. The overall level of layoffs did rise in August; however, it remained considerably below the spikes historically associated with past recessions and even lower than the increases observed in 2023 and 2015.

RBC suggests that, while the current wave of tech layoffs may not be as severe as in previous downturns, it could lead to a reassessment of market positions. Investors might begin moving out of growth-oriented sectors, like technology, and into more defensive areas such as utilities and consumer staples, which have demonstrated resilience amid economic uncertainty. This trend has already begun to show, as defensive sectors performed strongly in the third quarter of 2024.

Furthermore, RBC points out that the timing of these layoffs coincides with a broader economic landscape marked by uncertainty, including potential election-related risks and policy changes. Historically, pullbacks tend to occur in September and October of presidential election years, with rebounds typically following.

In addition, RBC is projecting multiple rate cuts by the Federal Reserve in late 2024 and early 2025, which could ease some pressures on the economy. However, these anticipated cuts may not be sufficient to allay growing concerns regarding the robustness of the labor market, particularly in the technology sector.