Software Company Layoffs and The Risk of Overinvesting in AI
At the margin the automation that AI provides around coding and quality assurance is contributing to Software company layoffs. However, many Software firms over-hired in 2020-2021, and unfortunately drank the Kool-Aid when their I-Bankers told them that interest rates would be far lower in 2025 than they actually are.
A 10-year Treasury yield above 4% does not make it inexpensive to rollover debt, to build datacenters, or to do anything frankly. Software companies are in earnings protection mode.
Factor in a Trump “dividend” along with tariffs, each of which will push prices higher, the already over-leveraged U.S. economy is not in a good spot, even if rates do fall.
The high-level “AI” sound bites that CEOs speak suggest that many CEOs are out of their depth. That is a dangerous place to be as a shareholder, as the risk of Software companies generating significant losses on AI investments is very real.