This article first appeared on GuruFocus.
Apollo Chief Economist Torsten Slok is warning that the AI boom could become a market-wide problem if returns on massive hyperscaler spending arrive later than investors expect. Alphabet (NASDAQ:GOOGL), Meta (NASDAQ:META), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) are collectively expected to generate nearly $470 billion in free cash flow by 2030, according to Apollo data, but Slok argues that weaker monetization could leave earnings, margins and ultimately stock valuations exposed.
“The bottom line is that AI has been the one thing holding up both the economy and markets,” Slok said.
His concern centers on the widening gap between AI spending and realized returns. Apollo noted that companies outside the major technology sector are spending heavily on AI without yet seeing a meaningful improvement in profit margins. Slok argues that the longer those returns take to materialize, the greater the risk that today’s infrastructure boom becomes vulnerable to a pullback.
The scale of spending is already enormous. Apollo estimates hyperscaler capital expenditure could reach roughly 3% of U.S. GDP annually from 2027 through 2029, more than double the peak of the late-1990s telecom buildout as a share of the economy.
Microsoft offers a clear example of the tradeoff. The company spent $41 billion on capital expenditures in its latest quarter while generating $19.6 billion in free cash flow. Microsoft Cloud gross margin slipped to 65%, partly because of continued AI infrastructure investment and higher usage.
Investor Takeaway
Investors should watch whether AI revenue growth begins catching up with infrastructure spending.
Cloud growth, free cash flow, depreciation expense and gross margins will be critical. Microsoft’s Azure revenue rose 43% in its latest quarter, showing demand remains strong, but management still expects fiscal 2027 capital expenditures to rise year over year.
The bullish case strengthens if hyperscalers can monetize new capacity while maintaining margins and cash generation. If capex keeps climbing while returns lag, however, Slok’s warning becomes more serious: weaker cash flow could pressure megacap valuations and spill into semiconductors, data centers and other AI-linked stocks.
