Junior roles are being eliminated in favor of AI automations. And while this makes corporations appear lean and efficient on the surface, this can lead to small errors that can stack up and affect operations.

In the banking sector for example, AI has been useful in detecting fraud signatures. However, it struggles with irregularities that fall outside the training data fed to models.

This is more pronounced in more advanced tasks such as risk work, as reliance on AI tools produce likely answers rather than interrogating outliers.

And recently, this problem has cropped up in the analysis of Fiserv’s (FISV) full-year outlook cut and Tricolor’s collapse.

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Youth unemployment is on the rise and AI adoption is partly to blame.

The U.S. youth unemployment rate reached 10.8% this summer—the highest level since 2021. Across Asia and Africa, youth unemployment rates are even worse. In India and China, it’s closer to 17%, while in Morocco it’s a staggering 36%.

Corporations are leaning on automation instead of training young talent. They frame it as efficiency, although the practical effect is the elimination of junior roles that once stabilized their own operations.

A market that relies too heavily on AI can appear streamlined on the surface, as fewer salaries to pay means higher profits. But underneath, human judgment is slowly disappearing and that is where small errors are beginning to stack up.

Simply said, the removal of junior workers is becoming a dangerous macro trend. And this shift raises the odds of failures that catch investors off guard.

AI reinforces patterns, but junior staff are the ones who notice when the same pattern breaks.

According to Bloomberg, traditional AI can detect established fraud signatures, although it struggles with irregularities that fall outside the model’s experience.

AI language models like ChatGPT move even further from the requirements of risk work, since they produce likely answers rather than interrogating the outliers.

Fiserv (FISV) is a great example of what can go wrong. The company is one of the largest payment processors in the U.S. It had built a reputation for steady growth, and analysts treated it as a dependable stock.

That view broke in a single day when Fiserv cut its full-year outlook. It cut revenue guidance by six percentage points and it cut earnings expectations by nearly 20%.

While it caught almost all of Wall Street off guard, the outlier was a 26-year-old analyst at Rothschild, Dominic Ball.

He pieced together customer complaints, slowing onboarding trends, and inconsistencies in management commentary, which led him to conclude that the business was weakening long before the guidance cut surfaced.

His work was straightforward but time-intensive, and it required judgment rather than AI pattern recognition. That is exactly the type of analysis companies lose when they eliminate junior roles and lean too heavily on automated systems.

The same pattern appeared in the Tricolor collapse. As a reminder, the used car company collapsed after it was found to have promised the same vehicles as collateral to multiple lenders.

JPMorgan Chase (JPM) was one of its lenders, but as the company has been using AI to automate the work of junior bankers, it didn’t catch any irregularities. Rather, a young analyst at a small company called Waterfall Asset Management caught the irregularity and notified JPMorgan.

These events show how exposed the system becomes when early-career talent disappears. Junior staff provide the vigilance that a computer model and more senior employees often miss.

If AI continues to replace junior roles, investors should expect more surprises.

AI can streamline operations, yet it cannot replace the judgment that notices when the story changes. A corporate landscape that sidelines early-career staff loses this critical thinking step.

While cutting junior employees and investing in AI will help companies get more profitable in the short-term, it’ll also expose those companies to more pain down the line.

And when that happens, it’s better to own stocks of companies that have leveraged AI tools to enhance their workforce rather than firms who chose to replace human labor with AI automation.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research