Apollo's Slok warns S&P 493's stalled margins threaten Mag7 valuations

The Magnificent Seven's profit margins climbed to 25% while the rest of the S&P 500 stalled at 10%, a divergence Apollo Global Management's Torsten Slok said threatens Big Tech valuations.

"We need to see profit margins rise outside the Magnificent Seven," Slok, chief economist and partner at Apollo, said in a June 30 note. "The rest of the S&P 500 — the other 493 components — becomes very, very critical."

The gap has persisted for three years despite hundreds of billions in corporate AI spending across healthcare, banking, energy, manufacturing and other sectors. Slok warned this creates conditions for what he called a "painful repricing" of AI company valuations, arguing that if customers buying AI products aren't getting richer from using them, the revenue growth baked into Big Tech stock prices may prove optimistic. He pointed to early warning signs already visible: difficulties with model routing, rising token costs and broader marketplace challenges that suggest implementation is harder than the pitch decks promised.

The warning from one of Wall Street's largest asset managers introduces uncertainty about the sustainability of the AI-driven bull market in mega-cap stocks. Slok drew comparisons to the dot-com era, noting that capital-intensive sectors such as utilities, insurance and defense face structural barriers to rapid AI adoption — compliance requirements, legacy systems and safety protocols that a software startup doesn't encounter.

The Dot-Com Parallel

Slok has drawn comparisons to the dot-com era before, and this latest note reinforces that framing. Capital-intensive and heavily regulated sectors face structural barriers to rapid AI adoption. A hospital can't deploy an AI diagnostic tool the same way a software startup ships a chatbot, he argued. Sustaining Big Tech's current valuations requires actual, measurable improvements in economy-wide productivity — not just more GPU sales or bigger cloud computing bills. The 10-year Treasury yield's trajectory and the dollar's strength add another layer of pressure on richly valued growth stocks, as higher discount rates compress the present value of future earnings.

What Earnings Season Will Reveal

The next few quarters of earnings reports from S&P 493 companies will be critical. If profit margins stay flat despite rising AI expenditures, the repricing Slok warned about becomes increasingly likely. "The question is whether the Magnificent Seven's implied earnings assumptions are too high relative to what will actually happen, or being realized too quickly," Slok said. "That is absolutely critical for the discussion of what the Magnificent Seven should be worth today." For traders, the signal is clear: watch the earnings reports of non-tech S&P 500 companies over the next few quarters for any sign that AI spending is translating into bottom-line results.

This article is for informational purposes only and does not constitute investment advice.