Layoffs, AI, and Productivity

October’s layoffs were the worst in twenty years, and a significant portion can be traced to companies accelerating their adoption of artificial intelligence. The cuts have continued. How should investors interpret this? On one hand, the surge in layoffs signals stress for workers and potential headwinds for the broader economy. Combined with massive AI-related Capex that has not yet translated into higher profits, the near-term picture can look troubling. On the other hand, the layoffs may reflect the efficiency and productivity gains that AI is expected to deliver.

One useful lens for understanding this development is a core productivity metric: sales per employee. With fewer workers, companies must generate more revenue per employee, making this ratio a natural way to gauge whether AI-linked efficiencies are materializing. The charts show the returns to sector-neutral sales-per-employee factor portfolios for stocks in both the S&P 500 and the S&P 500 Growth indices.

Since the AI boom began in late 2022, the market has increasingly rewarded companies with higher sales-to-employee ratios. The charts track the cumulative return of a long-short, sector-neutral portfolio that buys companies with high sales per employee and shorts those with low figures. Before the release of ChatGPT on November 30, 2022, the market was largely indifferent to this factor. After that point, firms with higher sales per employee began to outperform those with lower ratios in a meaningful way. Given the timing, it is reasonable to attribute this shift to the market’s expectation of AI-driven productivity gains.

Through early 2024, the sales-per-employee factor behaved similarly for growth stocks and the broader S&P 500. Since then, however, the advantage has become more pronounced for growth companies. The top chart highlights the divergence, and the bottom chart zooms in over the past year to show that the growth-stock premium continues. The message seems clear: the market believes AI-enabled productivity improvements are especially strong for large-cap growth firms, while remaining positive across the S&P 500 more broadly.

AI has been boosting measured productivity—captured here through the sales-per-employee factor—since the end of 2022, with a powerful effect on growth stocks since early 2024. And while the recent wave of layoffs is painful, the market’s substantial reward for high-productivity firms suggests investors can view these workforce reductions as tangible evidence that AI-driven efficiency matters.