Companies are using AI as a new narrative for layoffs and cost-cutting, a trend the market is quickly pricing in as a positive development. However, global investment research firm Morningstar has issued a warning that this focus may obscure AI's more significant value source: enhancing productivity through employee redeployment rather than simply reducing headcount.
According to Bloomberg, Australian software firm Wisetech Global announced plans to cut 2,000 jobs over two years, representing approximately 30% of its workforce. Following the announcement, its stock price rose by 11%. Similarly, US payments company Block revealed its intention to reduce its employee headcount by more than 40%, leading to a 23% surge in its share price during after-hours trading.
In a report published Thursday, Morningstar analyst Lochlan Halloway stated that the market "appears fixated on what AI might destroy, rather than what it can create." He suggested that some companies have a history of periodic layoffs, and AI is often used to provide a new justification for these actions, not necessarily representing a genuine technological transformation.
Investor concerns about AI reshaping the economy and labor market have dominated sentiment this month, causing pullbacks in some sectors—a phenomenon some are calling "AI panic trading." As earnings season progresses and corporate guidance faces greater scrutiny, companies are expected to provide more detailed explanations of how AI is impacting their balance sheets.
Morningstar points out that a growing number of firms are citing AI as a reason to cut staff and trim expenses, rather than utilizing it to unlock productivity gains by redesigning roles and processes. Halloway believes this shift in market focus makes it easier for investors to interpret layoffs as direct evidence of AI implementation, while overlooking the potential for organizational redesign that the technology enables.
He added in the report that some enterprises had established patterns of cyclical staff reductions even before the advent of AI. The integration of AI does not necessarily alter this pattern but may instead change how management communicates its cost-cutting strategies.
The stock price reactions to Wisetech Global and Block highlight this market logic. Investors appear to strongly favor the AI cost-reduction narrative, as short-term expense savings are often more quickly reflected in profit expectations than narratives centered on productivity and long-term growth.
Despite market enthusiasm, Morningstar maintains a cautious stance. Halloway emphasized that companies can also use AI to boost productivity, not by eliminating jobs, but by redeploying employees into higher-value roles, thereby unleashing incremental output driven by AI.
He wrote that AI "can, and likely will," disrupt old operational methods in the tech sector. However, large, established companies might be in a stronger position to leverage AI and build new tools "we cannot yet imagine."
Regarding Wisetech Global, which is still in its early expansion phase, Halloway suggested that its layoff decision "may reflect management learning how to frame cost-cutting with a new narrative by 2026," rather than indicating that AI has fundamentally altered its business structure.
Amid the interplay of "AI panic trading" and earnings season, Morningstar's core advice is for investors to distinguish between two scenarios: cost reductions packaged in an AI narrative, and sustainable productivity improvements achieved through the redesign of organizational structures and roles. As corporate disclosures and guidance receive increased attention, the market will likely focus more on assessing how AI genuinely affects a company's balance sheet and operational quality, rather than viewing layoffs as the sole visible indicator of efficiency gains.
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