Apollo Global Management Inc.’s Torsten Slok warned that companies outside the giants of the technology sector are failing to show gains in profitability from their spending on artificial intelligence, posing risks to Big Tech valuations.
“We need to see profit margins go up outside the Magnificent 7,” Slok, Apollo’s chief economist, said Tuesday on Bloomberg Television’s Surveillance, using the shorthand term for the US tech titans. “In other words, what’s going on with the S&P 493 becomes very, very critical.”
Investors have been seeking to justify sky-high investments and valuations around AI, with shares of global semiconductor companies and the so-called hyperscalers such as Amazon.com Inc. jumping to records on optimism for the technology. But many stocks have hit turbulence in recent months on fears about increased competition, possible overcapacity and whether plans for hundreds of billions of dollars in capital outlays will pay off.
Samsung Electronics Co. offered the latest cautionary tale on Tuesday. Shares of the world’s biggest memory maker tumbled more than 9% in Seoul after estimate-beating results failed to impress investors accustomed to eye-popping growth numbers. The result hit US stocks, with S&P 500 and Nasdaq 100 contracts falling and peers such as Micron Technology Inc. and Sandisk Corp. also under pressure.
Slok said Wall Street needs to see positive results on earnings and margins from AI adoption among what he called the S&P 493. If not, doubts about valuations are likely to grow, including those for Big Tech.
“Let’s say it takes several years before profit margins begin to go up. The question is whether the implicit earnings assumptions in the Magnificent 7 are too high, or too fast relative to what’s actually going to happen,” he said. “It’s absolutely critical for a conversation about, what should the value be of the Magnificent 7 today.”
Written by: Jonathan Ferro and Scarlet Fu @Bloomberg
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