AI layoffs lead to a surge? Morningstar criticizes: redeploying employees can release more value than simply "cutting" them

Companies are treating AI as a "new narrative" for layoffs and cost-cutting, which is being rapidly priced in by the market as a positive, but Morningstar (a global authoritative third-party fund rating and investment research institution) warns that this may obscure a more important source of value from AI: enhancing productivity through the redeployment of employees, rather than simply reducing headcount.

According to Bloomberg, Australian software company Wisetech Global announced it would cut 2,000 jobs over the next two years, about 30% of its total workforce, and its stock price rose 11% following the announcement. American payment company Block also announced plans to reduce its workforce by more than 40%, and its stock rose 23% in after-hours trading.

Morningstar analyst Lochlan Halloway stated in a report on Thursday that the market "seems to be focused only on what AI might destroy, rather than what it can create." He believes that some companies have a history of layoffs, and AI is more often used to provide a new justification for layoffs rather than representing a genuine technological transformation.

This month, investor concerns about AI reshaping the economy and labor market dominated sentiment, leading to pullbacks in some sectors, which some have referred to as "AI panic trading." As the earnings season and performance guidance come under closer scrutiny, companies will need to more clearly explain how AI impacts their balance sheets.

AI is used as a reason for cost-cutting, rather than truly improving productivity

Morningstar points out that an increasing number of companies are using AI as a reason to reduce headcount and trim costs, rather than to release productivity through adjustments in roles and processes.

Halloway believes that this shift in market focus makes it easier for investors to view "layoffs" as direct proof of AI implementation, while overlooking the organizational redesign opportunities that technology brings.

He added in the report that some companies had cyclical patterns of layoffs even before AI emerged, and the introduction of AI does not necessarily change this; what may change more is the management's way of expressing cost reductions.

Layoffs lead to stock price premiums, investors chase the AI cost-cutting narrative

The stock price reaction of Wisetech Global highlights this pricing logic. The company proposed that AI would enhance efficiency while cutting 2,000 jobs, about 30% of its workforce, and the stock immediately rose 11%. Similarly, Block's announcement of a workforce reduction of over 40% led to a 23% increase in its stock price after hours.

Morningstar believes that such reactions indicate a strong investor preference for AI-driven cost reductions, as short-term cost-cutting narratives are often more quickly reflected in profit expectations than productivity and growth narratives.

Morningstar questions "AI equals layoffs," advocating for redeploying human resources to high-value roles

Despite the market's enthusiasm, Morningstar remains cautious. Halloway emphasizes that companies can also use AI to enhance productivity, but the path is not to eliminate positions, but rather to redeploy employees into higher-value roles, thereby unlocking the incremental output that AI can bring He wrote that AI "can, and likely will" disrupt the old operating methods of tech companies, but large existing enterprises are actually in a more advantageous position, as they can leverage AI and build "new tools that we cannot yet imagine."

For Wisetech, which is still in the early stages of expansion, Halloway believes that its layoffs "may reflect more that the management team is learning how to give a new narrative to cost reductions for 2026," rather than necessarily indicating that AI has fundamentally changed the operational structure.

Earnings Season Focus: Don't Just Look at the Cost Line, But Also How AI Changes the Balance Sheet

Amid the intertwining of "AI panic trading" sentiment and earnings season, Morningstar's core reminder is that investors need to distinguish between two things: first, cost reductions packaged with an AI narrative, and second, sustainable productivity improvements brought about by organizational and job reconfiguration.

As companies disclose and guide more closely, the market will next focus on assessing how AI truly impacts companies' balance sheets and operational quality, rather than just viewing "layoffs" as the only visible indicator of efficiency improvement.

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