A slower AI payoff risks tipping the economy into recession, Apollo says

By Hannah Pedone

Growing threats from China and falling token prices may put AI financials at risk

The "Magnificent Seven" megacap tech companies are so big that their financials have implications for the broader market and economy.

Artificial intelligence has been "the one thing" propping up the economy and global markets, according to Apollo Global Management. And that sets up a precarious situation.

If AI doesn't pay off as quickly as expected, that would become "everyone's problem," according to the title of a new note from Torsten Slok, chief economist at Apollo.

According to Slok's analysis and FactSet data, the combined free cash flow from hyperscalers Google (GOOGL) (GOOG), Meta Platforms (META), Microsoft (MSFT) and Amazon.com (AMZN) is expected to more than quadruple from 2026 to 2030.

Yet at the same time, Chinese models now make up a greater portion of the world's 50 most used models. Chinese models are also gaining when looking at token usage, where they now lead their U.S. counterparts among the top 20 models.

Between those trends and the risk of declining token prices, free cash flow may fail to grow as robustly as current estimates suggest, according to Slok's note.

If free cash flow improvements disappoint, capital expenditures and the depreciation that comes with them will still "hit on schedule" and squeeze margins, Slok added.

Such a scenario could lead to a selloff among the "Magnificent Seven" grouping of large technology companies. Given their predominance in the S&P 500, that could pressure the index as a whole, he said.

"With so much riding on so few names, a slower payoff wouldn't just be a sector problem, it would risk tipping the economy into recession and the S&P 500 into a correction," Slok wrote.

Big money is on the line. According to BofA Securities, the Magnificent Seven hyperscalers have devoted $234 billion to capital expenditures this year. Meanwhile, BofA expects the combined free cash flow of Amazon, Google, Meta and Microsoft, along with Oracle (ORCL), to turn negative over the next 12 months, for the first time since at least 2007.

See also: 20 stocks in the S&P 500 that plunged the most in 2026's first half

Others view the China situation more positively. Brendan Burke, research director at Futurum Equities, believes the rapid adoption of Chinese open-weight models "substantiates demand for intelligent reasoning and will encourage hyperscalers to continue investing in frontier capabilities."

A major risk for the four leading hyperscalers is that competing labs will develop their own computing infrastructure and wean themselves off existing clouds, he said. But even in that case, Burke thinks free cash flow would shift among vendors but not diminish.

And Giuseppe Sette, president of the AI investment analytics firm Reflexivity, thinks a drop in token prices could be broadly helpful, rather than destructive to AI economics.

"If token prices come down, we'll use more AI. Tech is used to disinflation, and it responds with product innovation," he told MarketWatch.

Technology is "by definition a disinflationary industry," and pricing for services and hardware both tend to decline over time, he noted.

"First, new offerings come to the market to replace old ones. Second, new technologies become available to solve old problems" far more cheaply, he said.

-Hannah Pedone

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07-09-26 1656ET