Significant slowdown in AI payoff could tip economy into a recession, says Apollo Global's Slok

• Current market pricing for AI assumes a doubling of revenue and free cash flow for hyperscalers (Google, Meta, Microsoft, Amazon) within 3-4 years.
• A slower AI payoff could lead to disappointing cash flows and earnings, potentially triggering a 'Mag 7' sell-off, stretching balance sheets, and increasing credit risk.
• The Fed is likely to keep rates higher for longer, as core inflation remains a concern despite falling oil prices, impacting assets with long-duration cash flows like tech and software.

Torsten Slok, Apollo Global's Chief Economist, warns that a significant slowdown in the payoff from AI investments could tip the US economy into a recession, as current market valuations for hyperscalers assume rapid revenue growth. He also highlights a decoupling of oil prices and yields, suggesting the Fed will maintain higher interest rates for longer due to persistent core inflation, negatively impacting long-duration assets.