Apollo Global Management's chief economist, Torsten Sløk, has issued a stark warning regarding the potential economic fallout if the anticipated profitability from massive artificial intelligence investments by hyperscalers does not materialize as quickly as expected. Sløk argues that the market is heavily reliant on a swift payoff from AI, and a slower return on investment could lead to a recession and a correction in the S&P 500.
The core of the concern lies in the divergence between significant capital expenditures and the actual realization of free cash flow. Hyperscalers, including Amazon, Meta, Google, and Microsoft, are projected to spend over $700 billion by 2026. This heavy spending has caused free cash flow at these traditionally cash-rich companies to plummet, pushing them towards debt financing. Wall Street analysts are banking on a substantial boom in free cash flow for hyperscalers starting in 2028, but Sløk believes these projections are overly optimistic and do not account for the slow adoption rates of new technologies in non-tech sectors.
Sløk outlines three primary risks. First, if cash flows and earnings disappoint, margins will be squeezed due to committed capital expenditures and depreciation hitting on schedule. Second, a sell-off in the "Magnificent Seven" stocks, which now constitute a significant portion of market indices, could drag down the entire S&P 500, affecting sectors like chips, power, and data centers. Third, if internal cash cannot cover spending, hyperscalers might rely more on debt, increasing leverage and potentially leading to ratings downgrades if profits lag. Apollo has assigned a 30% probability of a U.S. recession in 2026 due to these risks.
