Weekly Reads - May 1, 2023
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Slowing cloud growth might be transitory as customers rationalize spending rather than move operations back to on-premises or hybrid environments.
The slowdown of cloud spending has led to speculation that cloud penetration might be higher than what the cloud providers are citing or that users are moving back to on-premises or hybrid environments. The most likely culprit is the optimization of cloud spending as users find ways to scale down on costs as economic sentiment worsens. Interestingly, the biggest cloud vendors could be the ones promoting optimization to lock customers into longer-term commitments and increase the overall value proposition to its users. These cloud giants had offered cloud savings plans prior to the pandemic, but many companies ignored them with business booming and having access to cheap money. Fast forward to today many of these companies are adopting these savings plans and working with the cloud providers to reduce waste. Many of these savings plans give users credits for their respective cloud providers that can be applied when paying for different services. While this trend is a negative for top-line growth it’s a positive for the long-term value proposition of the cloud versus on-prem. The ability to scale down costs easily on the cloud is a positive feature that on-prem doesn’t have. Cloud vendors extending credits and helping users reduce cloud waste might be a short-term revenue headwind, but it can win customer loyalty in the long run while attracting new users who might be looking for a cost-efficient alternative to their current on-prem infrastructure.
The hypothetical impact of AI on labor and hiring practices are becoming reality with companies already aggressively leveraging AI to reduce labor cost and improve workplace productivity.
AI is the latest market buzzword with the largest and smallest companies giving their opinion on how AI will maximize their operational efficiency and change how they do business. After months of just chatter, we are seeing the first signs that AI might have a significant impact on U.S. hiring and labor practices. IBM has announced plans to halt hiring for non-customer-facing roles which the company thinks can be replaced by AI. IBM went a step forward and announced that they see 30% of their non-customer-facing roles today being replaced by AI going forward. IBM has made it clear it won’t stop hiring in general and they will transition impacted workers to other divisions. While the impact of this announcement is relatively small (7,800 workers) it is concerning when you consider we are still in the early stages of AI. If 7,800 jobs at one of the largest tech companies are susceptible to today’s AI capabilities, how many jobs will be gone when AI matures and new functionalities are discovered? The U.S. could face a potential labor and educational crisis in which many college degrees and worker skills are irrelevant with AI able to replace these skills. As AI continues to improve it becomes more important that current workers are given opportunities to shift their skillsets to new areas to avoid being replaced by AI. If companies or regulators don’t put into place programs to support AI-impacted knowledge workers we could witness a mass upheaval in the labor market that might be difficult to fix.
The shift in big money managers’ funds from cyclical industries to resilient industries signals that economic sentiment continues to worsen despite the recent rally from October lows.
Recession fears are setting in after a massive stock market rally off October lows. The biggest stock pickers are increasingly worried about a slip in the economy and are moving capital away from cyclical industries to resilient sectors like consumer staples and utilities. Hedge fund’s exposure to cyclical industries is near the lowest levels since 2008 as investors are positioning themselves for a 2009-style recession. This is a departure from last year in which cyclical industries like oil were the biggest winners and a sector that saw mass inflows after years of underperformance. Bank of America has already reported that cash holdings stayed elevated, and bonds were favored over stocks more than at any time since 2009. While there is always a chance that this is a short-term trend and capital returns to these sectors it is interesting how sensitive managers are to incoming data points. Earning season should help bring more market clarity and provide deeper insight into the state of certain sectors and the general economy.