Apollo's Torsten Slok Talks Big Tech Risk

**SPEAKER_1** (0:02)
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**SPEAKER_2** (0:07)
So here's the latest this morning, Apollo noting a lack of profit margin gains due to AI outside of the tech sector. Torsten Slok of Apollo writing, There's a mismatch between current earnings expectations and the actual time firms need to generate ROI on AI investments, and it could have significant implications for many AI company valuations. Torsten joins us now for more. Torsten, good morning. Good to see you. Let's build on that quote. What are you tracking right now? What are you seeing?

**Torsten Slok** (0:33)
Well, what's really, really important in this discussion is that, of course, profit margins have been phenomenal in the Magnificent 7, but what really is critical is that now we need to see profit margins go up outside the Magnificent 7 In other words, what's going on with S&P 493 becomes very, very critical because at this point, profit margins, S&P 493 have just not gone up. So therefore, one very important conclusion and one very important place to look for lines of AI beginning to have an impact is to look at what's going on in earnings growth, profit margins and overall the health of the S&P 493 as a result of the technological improvements we're seeing at the moment.

**SPEAKER_2** (1:08)
Meta also making a call potentially as well that the ROI on selling excess capacity might be higher than using it internally. Does that reinforce some of this message for you?

**Torsten Slok** (1:17)
Well, the issue of course is that there is a huge of course built out of capacity and compute and there will literally be unlimited demand for compute. The question is just at what price and who will the buyers be and where is that capacity coming from? And the big picture still remains that AI is a very revolutionary technology. Everyone agrees on that. But the key question now is how long time is it going to take before this shows up, especially in profit margins outside the Magnificent 7? Because if the S&P 493, let's say that it takes several years before profit margins begin to go up. The question is whether the implicit earnings assumptions in Magnificent 7 are too high or too fast relative to what's actually going to happen. So that mismatch between are we going to see profit margins, earnings growth go up outside the Magnificent 7? Is that going to come slower? Is it going to come faster? It's absolutely critical for conversation about what should the value be of the Magnificent 7 today.

**SPEAKER_4** (2:11)
In exactly one week's time, as John was reminding us, the big banks begin reporting earnings and we have the kickoff of the earnings season. There's going to be a lot of discussion on AI and what it means for jobs in the banking sector. How do you parse through what the companies say to really understand what it means in terms of whether they're going to cut jobs or not?

**Torsten Slok** (2:29)
What's really challenging about this is to talk about AI exposure because there's a lot of different studies already that look at what is the exposure, meaning AI exposure in different occupations.
These two studies fall into different buckets of one saying, what is the actual exposure in terms of actual AI usage? So this is trying to measure, say, what are people using Claude for, what tasks, and what request did they get, and therefore measuring and quantifying the actual usage of AI. Another bucket is studies that look at, well, let's theoretically assume what is the economist exposure to AI, and then try to match that with occupations and figure out what is employment in those sectors. And those studies, of course, are what you call more theoretical. So the challenge is that there is not an agreement about what does AI exposure mean. So that's raising all these questions around, well, what does it even mean when we say that a certain part of the economy is exposed to AI? Because that's just not at this point in the studies that look at this, a really good way to quantify what AI exposure means. And that means also for the financials, that means for legal services, that means for consultants, that we're having some challenges figuring out, how do we even quantify what is the impact of AI? We all know that it's going to make a big difference, but the speed with which this difference comes along, how many people is impacting today, next month, next year, it becomes absolutely critical when you again think about the company valuations today, are the net present value of the cash flows that these companies get in the future.