Apollo's Sløk: The market faces big risks if hyperscalers' AI profits get delayed

Apollo Global Management chief economist Torsten Sløk warned that Wall Street faces significant risks if hyperscalers' AI investments fail to generate expected profits, potentially triggering a sell-off in Big Tech stocks that could spread to the broader market. Sløk identified three key risks: disappointing earnings, a Magnificent Seven sell-off dragging down the S&P 500, and potential credit rating downgrades if cash flow falls short of capital expenditure commitments.

Wall Street expects hyperscaler companies' free cash flow to boom, starting in 2028. If that boom doesn't materialize, the consequences could be severe, warned Apollo Global Management chief economist Torsten Sløk. Disclosure: Yahoo is a portfolio company of funds managed by affiliates of Apollo Global Management. As hyperscalers have poured money into artificial intelligence, free cash flow at the traditionally cash-heavy Big Tech leaders has plummeted. That trend has pushed the "Magnificent Seven" companies to pivot toward debt issuance to fund hundreds of billions of dollars in spending. Spending in 2026 by Amazon AMZN https://finance.yahoo.com/quote/AMZN/ , Meta META https://finance.yahoo.com/quote/META/ , Google GOOG https://finance.yahoo.com/quote/GOOG/ , GOOGL https://finance.yahoo.com/quote/GOOGL/ , and Microsoft MSFT https://finance.yahoo.com/quote/MSFT/ is now expected to cross $700 billion https://finance.yahoo.com/sectors/technology/article/meta-microsoft-amazon-and-alphabet-are-about-to-spend-a-shocking-amount-of-money-to-dominate-the-ai-era-115359575.html as those companies have gone from being the "source of cash" to the "user of cash," Bank of America's Savita Subramanian and Vivek Arya noted. The industry is counting on that trend of declining free cash flows to turn around as the AI business case, in theory, starts generating serious cash for companies that have thrown money at the burgeoning technology. Apollo's Sløk is looking for three potential risks if that doesn't happen. The first risk is if earnings results disappoint. Should the projected surge of free cash flow be delayed "while committed capex and heavy depreciation hit on schedule," it could squeeze margins, Sløk wrote. Without money coming in the door, the argument goes, massive capital expenditure commitments could become increasingly hard to fund. To be fair, the hyperscalers are in healthier financial positions than the 1990s tech leaders that blew up in the market collapse through 2000 and 2001, Bank of America recently noted to clients. But today's Big Tech leaders, BofA analysts said, are now "at least as capital-intensive as oil companies," which traditionally rank among the most capital-intensive businesses in the market. Furthermore, the decoupling of hyperscalers' earnings-per-share growth from free cash flow could mark a potential deterioration in earnings quality, per BofA. That trend gets at Sløk's next risk to watch. Lesser-than-expected earnings from Big Tech could trigger a Magnificent Seven sell-off that takes the rest of the market — the "S&P 493" — with it, according to Sløk. Those seven Big Tech stocks "now account for so much of the indices, the pain can't stay contained, it spreads to chips, power, data centers and the S&P 500 as a whole," Sløk wrote. And if internal cash is unable to keep pace with spending, pushing hyperscalers further into the debt market, their stocks could invite rating downgrades if profits fall behind schedule.