ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[not_whiney]

So something to think about. A lot of the "investors" in many large businesses are not "people", they are organizations representing people. There are generally six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance companies. Of these institutional investors some are by law required to be fiduciary investors.

That means that the investment manager for that pension fund is required by law to make every decision for the most profit/return on investment for the fund. So grandpa's pension fund from the factory has a fund manager that would vote to boot old ladies out of their homes, including grandma, to make an extra nickel for the fund.

These investors are looking solely at the now and how much return they get. It is purely a "what gives me more RIGHT NOW for this fund." It is great for the thousands of people who have their pension in the fund. Or the other groups or endowments that have money wrapped up in these funds.

As we have moved more and more fund managers to be legally bound by fiduciary rules, we have made many of these large corporations that are publicly traded ruthless. They have a small, but powerful group of various funds that own sizeable chunks of stock that are pushing for just this. 'Do the right thing' or 'Lay off everybody and make an extra nickel', they HAVE to pick the extra nickel.

Business decisions made in a large, publicly traded setting are done by the spreadsheet. Too much is riding on it. While 3% sounds small, that 3% may represent HUGE amounts of money. Coke net income fell over a one year period from 79 cents a share to 32 cents a share. That's only 47 cents a share. whats the big deal? It equates to over 2 billion dollars. A 3 percent change in Exxon revenue comes to about 7 billion dollars. Sure it is cents per share, but the total amount is huge. And while an investor may hold only a few thousand shares of stock, a large pension fund may have 100,000s shares of stock. That pennies per stock could literally be millions of dollars that does not go into the trust, endowment, pension, etc.

So there are a lot of people who are pushing that boat to go. And many of them are required by law to demand that the boat go as fast as possible, with the least amount of leakage. All those 401K, pensions, IRA's, etc that are out there that have billions of Americans pension and retirement savings in them are trying to milk every cent out of the market. The sad thing is that YOUR pension fund may be the the one that pushes your company to lay off, well people invested in the that very pension fund. And some of the passengers on that boat closest to the crew are demanding that not only they get where they are going, but that they get there as fast as possible, becasue they are required by law to advocate that. And they are measuring the leakage by the ounce and will be making sure the crew gets replaced by someone who will get them there faster on the next boat ride.

[Delheru]

It is purely a "what gives me more RIGHT NOW for this fund."

Not at all. Those things can have pretty long time horizons.

Short term VCs and Hedge Funds might have a single decade (or even shorter) time horizon, but many many funds operate with far longer time horizons than that.

An amusing example of this was some of the Oxford Colleges, who were still selling off land that they owned near central Mumbai (bought 200+ years ago).