The fact that you are out of watches does not mean that its VSCode
's fault.
VSCode
has for sure issues with excluding directories from watch (on linux).
But since you have counted the files yourself, the error message in this case is probably misleading and some other application has already exhausted watches.
To trace the guilty app you can use this nice script
与恶龙缠斗过久,自身亦成为恶龙;凝视深渊过久,深渊将回以凝视…