Dear readers,
On Saturday we described the companies pouring concrete and stringing power lines for AI’s physical layer as capturing an outsized share of this market’s gains. We noted that everyone else was paying the bill. Now we know what “paying the bill” looks like in practice: it looks like 1,100 people at Cloudflare cleaning out their desks while the company posts 34 percent revenue growth.
The S&P 500 closed Friday at a record 7,398.93, up 0.84 percent. The Nasdaq Composite hit 26,247.08, gaining 1.71 percent. Earnings season is delivering the strongest quarterly results in more than four years. And inside those results, a brutal new logic is crystallizing. The software industry has replaced “growth at any cost” with something closer to “growth at the cost of headcount.”
The Cloudflare Paradox
Cloudflare (NYSE: NET) reported first-quarter fiscal 2026 numbers that any growth-stage CEO would frame and hang on the wall: revenue of $639.8 million, up 34 percent year-over-year. Adjusted earnings per share of $0.25, up 56 percent. Operating income of $73.1 million, up 31 percent. The company’s largest customer cohort — accounts spending more than $100,000 annually — expanded by 38 percent.
Then management announced it was cutting roughly 20 percent of its workforce, approximately 1,100 employees, to restructure around what it calls an “AI-first” operating model. The restructuring will cost $140 million to $150 million in 2026. The stock dropped as much as 24 percent after hours, a reaction driven less by the layoffs themselves than by a gross margin that slid from 77.8 percent in Q2 2024 to 71.2 percent in the quarter just reported. Piper Sandler, undeterred, raised its price target from $222 to $250.
Nvidia CEO Jensen Huang, speaking at a Carnegie Mellon commencement ceremony over the weekend, used Cloudflare’s cuts to make a point he has been sharpening for months: AI will not replace people, but people who use AI will replace people who don’t.
The Layoff List Keeps Growing
Cloudflare is not an outlier. It is a data point on a trend line that steepened considerably in May.
PayPal disclosed plans to reduce its workforce by 20 percent — roughly 4,760 employees — over the next two to three years. Coinbase is cutting approximately 700 jobs, or 14 percent of staff, citing a weak crypto market and a pivot toward AI-driven operations. Even Elon Musk’s xAI is eliminating about 500 positions in data annotation, the very human labor that trains the models meant to reduce human labor.
Bain & Company puts a number on the force driving these decisions: the U.S. market for “agentic AI automation” — software that handles labor-intensive coordination tasks autonomously — is now estimated at $100 billion. That figure represents both a massive commercial opportunity and a direct threat to the knowledge workers who currently perform those tasks.
The Winners: Akamai and RingCentral
Not every software company is shrinking its way to profitability. Some are growing into AI revenue that actually exists.
Akamai Technologies (NASDAQ: AKAM), which we discussed on Saturday in the context of its $1.8 billion, seven-year cloud infrastructure contract with a leading frontier AI model developer, reported Q1 earnings per share of $1.61 on revenue of $1.074 billion. The decisive driver was its cloud infrastructure services segment, which grew 40 percent. The stock jumped 21.08 percent to $147.71.
RingCentral (NYSE: RNG) offered a different proof point. The company’s AI product adoption among paying customers doubled year-over-year and now exceeds 10 percent of its user base. Revenue came in at $644 million, up 5.3 percent. EPS hit $1.20, a 20 percent increase. GAAP operating margin reached a record 7.8 percent. Management raised its full-year free cash flow outlook to approximately $600 million and initiated a first-ever quarterly dividend of $0.075 per share. RingCentral is not growing fast, but it is converting AI features into margin expansion — the exact playbook the market is now rewarding.
The Macro Backdrop: Jobs, Oil, and a German Wildcard
The broader market drew support from a U.S. jobs report that came in well above expectations: 115,000 new positions created in April, roughly double the 55,000-to-65,000 consensus. The unemployment rate held steady at 4.3 percent. Strategist Ed Yardeni responded by raising his 2026 S&P 500 target from 7,700 to 8,250 and forecasting index-level earnings per share of $330.
Geopolitical risk, largely shrugged off by equities, showed up in crude. After President Trump rejected an Iranian counterproposal to end the ongoing conflict as “completely unacceptable,” Brent crude rose to $103.72 per barrel — extending the pressure on energy costs we flagged over the weekend.
In Germany, where the DAX posted modest losses amid Middle East uncertainty, logistics billionaire Klaus-Michael Kühne raised his stake in Lufthansa Group from just over 15 percent to above 20 percent on Friday. Kühne has been building his position methodically, and the crossing of the 20 percent threshold puts him in a position to influence corporate strategy at a carrier still navigating post-pandemic restructuring.
What Comes Next
Tuesday’s U.S. consumer price data will determine whether this rally has room to run. Analysts expect a monthly increase of 0.6 percent, down from 0.9 percent in March, with the annual rate at 3.8 percent. With oil above $100, the question from Saturday remains unanswered: are persistently elevated energy prices feeding through into broader inflation?
If CPI comes in hot, the Fed stays frozen at 3.50–3.75 percent and the cost of capital remains punishing for companies that haven’t yet found their efficiency formula. If it cools, the market’s new valuation framework — rewarding headcount cuts and AI-driven margin expansion over raw revenue growth — gets another leg of validation.
The software industry spent the last decade hiring aggressively to chase growth. It is now firing aggressively to chase margins. The companies reporting record earnings and record layoffs in the same press release aren’t confused. They’re executing a strategy the market has explicitly asked for. Whether that strategy produces durable businesses or merely durable stock prices is a question that won’t be answered by one quarter’s results.
Best regards,
The StocksToday.com Editorial
