Stagflation Looms as AI Becomes US Economy's Lifeline | Apollo Macro Outlook

What's New

Apollo Global Management's 2026 macroeconomic outlook from Chief Economist Torsten Slok warns that the US economy faces a near-term stagflationary environment—with growth softening due to trade frictions and tariffs while inflation remains stuck near 3%—before an AI-fueled reacceleration takes hold, creating a complex backdrop that Slok compares to the 1970s and requires investors to position for higher-for-longer interest rates.

Why It Matters

The US economy has become dangerously dependent on AI performance, with hyperscalers now dedicating a record 60% of operating cash flow to capex while corporate investment outside AI has flatlined to zero growth—meaning any rollover in AI would have cascading negative consequences across data centers, equity markets, and consumer sentiment at a moment when 45 million Americans are resuming student loan payments and delinquencies are reaching Global Financial Crisis levels.

Big Picture Drivers

• K-shaped divergence: Highest-income earners now experiencing stronger wage growth than all other groups, reversing the 2016-2022 trend when lowest-wage earners led

• Consumer stress: Student loan payments restarted for nearly 20% of the population while credit card and auto delinquencies reach GFC-level territory

• AI concentration: The 10 biggest S&P 500 stocks now comprise 41% of index market capitalization, eliminating traditional diversification benefits

• Policy tailwind: The "One Big Beautiful Bill" effective January 1, 2026 will boost GDP by 0.9% through immediate capital expense deductions

• Foreign appetite: Despite Liberation Day turbulence in April 2025, foreigners have resumed strong purchasing of US Treasuries, equities, and corporate bonds

By The Numbers

• 45M: Americans with federal student loans now resuming payments

• 60%: Hyperscaler capex as share of operating cash flow (historic high)

• 30%: Consensus US recession probability for 2026

• 0.9%: Expected GDP lift from One Big Beautiful Bill in 2026

• 3%: Inflation level keeping rates higher for longer

Key Trends to Watch

• Stagflation risk: Growth will likely soften over the next few quarters as tariffs are implemented while inflation remains above target, keeping interest rates elevated.

• AI demand signals: Corporate AI adoption rates are starting to flatten across all firm sizes, requiring close monitoring for any signs of weakening demand.

• US-Europe divergence: Europe faces lower recession risk (20% vs 30% for US) with falling inflation supporting earlier rate cuts—an unusual and increasingly relevant divergence for global allocations.

• Earnings bifurcation: 2026 earnings expectations have been revised up for the Magnificent 7 while being revised down for the S&P 493, reinforcing market concentration risks.

The Wrap

Apollo's Chief Economist frames 2026 as a year of contradictions: bullish medium-term momentum powered by AI and fiscal stimulus colliding with near-term stagflationary pressures, consumer strain, and extreme market concentration—requiring investors to navigate with caution while recognizing that the economy's fate is now inextricably linked to the continued success of the AI buildout.