Slok Says Profit Margins Outside Mag 7 Need to Rise

Summary

Apollo chief economist Torsten Slok argues that profit margins must broaden beyond the Magnificent Seven for Big Tech valuations to be justified. He warns that AI concentration is dominating markets and the economy, and recommends value investing as a hedge against the risk that AI does not deliver on high expectations.

• Profit margins have not risen in the S&P 493, making future earnings growth outside the Mag 7 critical.
• If profit margins fail to broaden, the implied earnings assumptions for the Magnificent Seven may be too high, putting those valuations at risk.
• AI is now a dominant factor in equity markets, IG issuance, high yield, and venture capital, creating concentration risk.
• AI-related spending on data centers and energy contributes roughly 0.7% to US GDP growth, with an additional 0.3% from wealth effects.
• Measuring AI's real impact is difficult because exposure studies range from actual usage metrics to theoretical occupational matching.
• Value investing is suggested as a defensive area to protect against downside if AI-driven growth fails to materialize.