Post-pandemic downturn enforces Big Tech ‘correction’

The long shadow that Big Tech has cast across the business and financial worlds just got a little shorter.

But while the planet’s wealthiest and most powerful technology groups may have started 2023 in an uncharacteristic mood of retrenchment, it is not yet clear whether they have entered a lasting phase of slower growth — or just a short-term correction.

Some of the leading companies in the tech industry seemed to reach a turning point late last year, when their most recent quarterly earnings suggested that an expansionist era might be coming to an end.

“Trees don’t grow to the sky,” says Jim Tierney, a growth investor at AllianceBernstein, summing up the mood on Wall Street. Sensing that digital markets, such as online advertising and ecommerce, were running out of steam, investors hit the reset button on tech valuations.

In stock market terms, 2022 ended a long period of increasing dominance that Big Tech had exerted over leading indices. The combined value of the five biggest tech companies — Alphabet, Amazon, Apple, Meta and Microsoft — tumbled by nearly $3.7tn during the year. The 38 per cent fall was double the 19 per cent decline in the S&P 500 index.

The most visible sign of retrenchment has been job cutting, which began to spread across the sector in the last two months of 2022. Meta, parent of Facebook and Instagram, bowed to Wall Street unrest and said it would slash 11,000 jobs. Amazon said this month it planned to cut its workforce by 18,000.

Yet, according to Steve Levy, director of the Center for Continuing Study of the California Economy, the cuts reflect little more than a “rebalancing”, as the tech companies react to slowing growth and unwind their recent boom in hiring. Comparing the present downturn with earlier reversals, Levy says: “It’s not the dotcom bust. It’s different from previous periods.”

The pandemic had brought an “amazing spike in tech spending”, says Sean Randolph, senior director of the Bay Area Council Economic Institute. The biggest companies “believed that this surge in digital activity that came in the pandemic would continue”. It was only when that turned out not to be so that they were forced into a “correction”.

Marc Benioff, chief executive of software company Salesforce, reflected the mood of contrition as he announced its decision in January to cut 8,000 jobs: “As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that.”

However, after the cuts, Salesforce will still have about 23,000 more workers than it did when the pandemic began three years ago — an increase of 47 per cent. And Meta’s job cutting will leave its headcount nearly two-thirds higher than when the pandemic hit.

If these cutbacks reflect little more than a sharp correction, though, there are three forces that could combine to make 2023 a more significant turning point for the tech giants.

The first is the fallback in demand for digital services that had been artificially inflated by the pandemic. As Randolph suggests, many tech companies assumed that the boom in internet shopping, online work meetings and video gaming caused by the pandemic would lead to a sustained increase in demand, as new digital habits took hold. But, in many cases, this hope proved to be unfounded.

It is also still unclear whether some customers brought forward future tech spending to deal with the pandemic emergency. If so, demand could fall back even further from here.

The second factor clouding the 2023 outlook is the impact of the economic slowdown. Warnings of weakening demand sounded like a drumbeat throughout 2022, getting louder as the year drew to an end. But, while sales of PCs and smartphones have fallen back, tech demand more generally has remained robust. A sharper downturn would change that.

The third factor is a weakening of the secular growth drivers that have supported Big Tech’s rise over the past two decades, as markets such as ecommerce and online advertising become more mature. Even while the long tech boom was in full swing, investors like Tierney warned that the secular forces that had driven the growth would inevitably weaken. If that time really has come, then 2023 will mark a significant turning point for Big Tech.