Markets No Longer Cheer Layoffs, Goldman Sachs Warns Announcing job cuts used to be a quick way for companies to boost their share prices, particularly when layoffs were framed as efficiency or cost-saving measures. That reaction has faded. Goldman Sachs says companies now underperform the broader market by around 2% after revealing layoffs. Investors appear increasingly unconvinced by management’s explanations. Even when job cuts are presented as part of harmless restructuring or productivity initiatives, equity markets are punishing stocks rather than rewarding them. Goldman Sachs analyst Elsie Peng says the shift reflects growing investor skepticism. In a research note published Monday, Peng analyzed stock performance following layoff announcements and found that markets may view claimed productivity gains as a cover for deeper problems, such as rising interest expenses or weakening profitability. According to Peng, labor market weakness in 2025 has been marked more by sluggish hiring than by traditional layoff indicators. Initial jobless claims and official layoff rates remain low, yet third-quarter earnings commentary suggested more job cuts could be coming. Many companies have blamed these reductions on automation and the use of AI to lower labor costs. Goldman’s findings show that the market reaction worsens when layoffs are explicitly tied to restructuring. While stocks announcing job cuts generally lag the market by about 2%, companies that directly cite restructuring have suffered much steeper declines, with average excess returns of negative 7%. The analysis also shows that firms announcing layoffs have experienced faster growth in capital spending, debt, and interest expenses, alongside weaker profit growth than industry peers this year. That pattern suggests layoffs may be driven by more concerning financial pressures than companies publicly admit. Despite this, Peng notes that Goldman’s equity and credit analysts see limited risk to the broader economy from layoffs so far. Corporate balance sheets remain broadly strong, and profit margins are still elevated. The S&P 500 ended slightly lower on Monday and is just over 1% below its record high after gaining 16% this year. U.S. stock index futures also edged lower ahead of key jobs data.

Citi expects a shift in market leadership from AI “enablers” to AI “adopters” as investors head into what could be a more volatile 2026. With the bull market entering its fourth year, volatility is likely to increase, making it harder to separate winners from losers in the AI race. Even so, Citi strategists remain constructive, citing an accommodative Federal Reserve, earnings growth above consensus, and a stronger fiscal boost from the OBBBA. Together, these factors support a year-end S&P 500 target of 7,700. That forecast is above the MarketWatch consensus of 7,500, which already implies roughly 10% upside from Friday’s close. Citi projects total market returns of around 13% in 2026 but expects leadership to rotate away from companies that build AI infrastructure toward firms that successfully adopt AI to boost productivity. The firm also anticipates broader participation across the index. Starting from elevated valuations, U.S. equities will face growing pressure to deliver strong fundamentals to justify prices. Citi’s base-case target of 7,700—outlined by Scott Chronert, Drew Pettit, and Patrick Galvin in the firm’s 2026 U.S. equity outlook—assumes S&P 500 earnings of $320 per share and a valuation multiple of 24 times earnings. While that represents only modest compression from current levels, Citi warns that greater dispersion in returns, especially among AI-related stocks, will make stock selection more difficult. Wall Street consensus earnings estimates for 2026 are closer to $310 per share, though Citi points to the ongoing resilience of corporate earnings. AI remains a powerful tailwind, but Citi sees investor focus gradually shifting away from hyperscalers, whose outlook remains debated, toward companies that can effectively integrate AI into their business models. The firm also expects more idiosyncratic performance among AI enablers, which now make up roughly 40% of the S&P 500, adding complexity to portfolio construction. To benefit from broader market leadership, Citi recommends positioning for positive earnings revision momentum in value, cyclical, and small-cap stocks. Growth stocks, including mega-cap technology names, will need continued earnings beats and guidance upgrades to support valuations. Citi’s outlook also assumes the Fed will cut rates twice in early 2026—earlier than markets currently expect—as higher unemployment emerges as a side effect of AI-driven productivity gains. The firm forecasts the U.S. 10-year Treasury yield will fall to 3.75% by the end of 2026, from about 4.18% today. In a bull-case scenario, stronger-than-expected earnings growth could push the S&P 500 to 8,300. In a downside scenario marked by weaker fundamentals and multiple compression, Citi sees the index falling to 5,700.