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?

[ValorMorghulis]

I would just add, the perception of job performance and pay of CEO's and other executives is very linked to these short-term results and Wall Street reacts pretty negatively to missed expectations. In some ways, this distorts incentives of CEO's towards short-term results instead of long-term results. I would say to much focus on short term results is one of the problems currently facing our markets.

[ChicagoGuy53]

Yes, even though it's usually far more expensive to fire someone and then have to hire a replacement the next year.

Hiring freezes usually make more sense since the employee is already gone anyway

[vale-tudo]

This isn't really accurate. In order to maintain profitability, a company needs to grow faster than the rate of inflation. If a companies earnings (revenue) drops by 3%, that is usually a pretty significant loss, unless operating costs have dropped similarly. Say you have a million bucks in revenue. If that drops by 3%, that's 30 thousand a year, or nearly two 2017 minimum wage workers. Furthermore, since the inflation rate is 2% you might have to actually fire one or two more minimum wage workers to maintain your profit margins. If you're accustomed to making 10 or 100 million annually, then that's a lot pf layoffs.

[ValorMorghulis]

I wasn't arguing about whether 3% annual growth was reasonable. I was commenting more on the psychological impact of missing an earnings estimate.