The recession signs continue. Shopify rocked stock markets as CEO Tobi Lutke acknowledged he had misjudged how long the pandemic driven e-commerce boom would last.

With the middle class getting squeezed by inflation and rising interest rates, we have seen a broader pullback in online spending. Amidst lower sales, Shopify announced it is laying off around 1000 workers, or around 10% of its global workforce.

Shopify joins others like Tesla, and many more corporate cuts seem inevitable. Netflix and Coinbase have announced layoffs earlier this year. Google parent Alphabet, and Facebook owner Meta have also announced the slowing of their pace of hiring.

The most affected divisions in Shopify will be recruiting, support and sales. However, the company will be eliminating “over-specialized and duplicate roles, as well as some groups that were convenient to have but too far removed from building products,” Lutke said in the memo.

Shopify was one of the e-commerce companies which thrived during the pandemic, but many warned that these gains would be unsustainable.

Tobi Lutke bet that online spending over commerce in stores would, “permanently leap ahead by 5 or even 10 years“. In anticipation, Shopify staffed up to meet this demand by more than doubling its employee base since the end of 2019.

“It’s now clear that the bet didn’t pay off,” Lutke said. “What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful 5-year leap ahead.”

Shopify forecasted that revenue growth would be lower in the first half of the year in its most recent earnings report. The company is scheduled to report second quarter earnings tomorrow (July 27th).

The stock is hanging on by a thread. With this lay off news, Shopify has fallen over 15% taking us to the major support zone. With earnings coming out soon, that could be the trigger which sees Shopify crumble and breakdown below this support level.

The next drop would take us down to $20 and below, continuing the downtrend which began back in December 2021 and has seen the stock give up its pandemic gains.

For the bulls out there, the fundamentals don’t look too positive especially with a recession around the corner. From a technical approach, if the stock can reclaim $40 it would trigger a new uptrend after breaking above this range. But then again, we would need a catalyst for this. At this point in time, it would have to be some sort of surprise fundamental.

This drop in Shopify is also weighing on the Nasdaq. We started earnings week with a bang, but now things are fizzling out with worse earnings. More importantly, the Nasdaq appears to be breaking below the breakout level. A zone which needed to hold for us to remain bullish. This is happening just as the Federal Reserve is about to raise interest rates by an expected 75 basis points. What matters to the market is how hawkish they will be.

In summary, Shopify is probably not an outlier. More layoffs are coming as we head into a recession. The real question becomes when will traders start pricing in worse earnings come Q3? Let me throw this in too: will a stronger US Dollar affect US corporate earnings as well?

Happy trading.