RBC analysts 'a little spooked' by the spike in tech layoffs

Investing.com -- Analysts at RBC Capital Markets in a note dated Monday mentioned rising concerns about the labor market, particularly within the technology sector. 

While overall layoffs remain below historical highs, a recent increase in layoffs among technology companies has drawn attention. 

“What caught our attention was the spike in layoffs for Technology companies which wasn’t as bad as those seen in late 2022 and early 2023, but otherwise rivals some of the worst spikes this industry has seen over time,” the analysts said. 

This stands out against a backdrop of cooling labor market trends, with payroll numbers falling below expectations in recent months. 

RBC has interpreted this broader trend as indicative of a labor market still in the process of normalization, rather than an outright contraction. 

However, the spike in tech layoffs is raising red flags, particularly for investors in the sector and the broader stock market.

RBC analysts stress that this uptick in layoffs could have ripple effects beyond the tech sector, impacting investor sentiment and triggering shifts in market dynamics. 

With tech companies at the forefront of market leadership in recent years, any instability in this sector may contribute to volatility and influence broader market rotations. 

“The overall level of layoffs moved up in August, but remained well below the spikes associated with past recessions, and was even a bit below the moves higher seen in 2023-2024 and 2015,” the analysts said.

RBC indicates that tech layoffs, even if not as severe as in previous downturns, could prompt a reevaluation of market positions. 

Investors may start rotating out of growth sectors like technology and into more defensive sectors like utilities and staples, which have shown resilience in the face of economic uncertainty. 

This shift is starting to become apparent, as shown by the strong performance of defensive sectors during the third quarter of 2024.

Analysts at RBC suggest that these layoffs come at a time when the broader economy is grappling with uncertainty, including election-related risks and policy shifts. 

“As we’ve highlighted before, we usually see a pullback in the S&P 500 in September and October of Presidential election years, with a rebound afterwards,” the analysts said.

At the same time, RBC is forecasting multiple rate cuts by the Federal Reserve in late 2024 and early 2025. 

This could provide some relief to the broader economy, but it may not be enough to stave off growing concerns about the health of the labor market, especially in the tech industry​.