According to reports from Investing.com India, Apollo Chief Economist Torsten Slok has raised concerns about the market's expectations for AI-driven profit margin improvements outside the technology sector. The market has spent the better part of the past two years pricing AI as though it will eventually function like a universal profit-margin machine, with chips, data centres and hyperscalers collecting revenue today while the far larger valuation leap rests on expectations that corporate America will soon use AI to do more with less, lifting margins across the S&P 493. As per Slok's June 30 note, the first chart represents the uncomfortable reality check - outside the technology complex, there is still no visible evidence of a broad AI-driven improvement in profit margins. This matters significantly because the AI trade is no longer valued merely on the earnings of a handful of semiconductor companies, but on the expectation that productivity gains will eventually spread through banks, insurers, manufacturers, logistics firms, healthcare providers and every other large corporate machine that has been promised an AI overhaul.
Wall Street analysts are raising S&P 500 profit forecasts at the fastest pace since the pandemic rebound, with analysts expecting S&P 500 company earnings to grow 25% over the coming year, according to data cited by the Financial Times. Consensus profit estimates have jumped nearly 20% in six months, marking the sharpest six-month rise since 2021. Michel Lerner, who leads UBS's HOLT analytics platform, warned of an 'earnings bubble' forming in the market, stating that shares tied to AI are priced to maintain supernormal profits, and that sustaining current levels of profitability and growth is highly unlikely. Ben Inker, co-head of asset allocation at GMO, noted that forecasts for the next two years are 'rising at an exceedingly high rate, nothing we have seen outside of a crisis recovery.'
As reported by Investing.com India, Slok's analysis reveals that outside the technology complex, there is still no visible evidence of a broad AI-driven improvement in profit margins. This matters because the AI trade is no longer valued merely on the earnings of a handful of semiconductor companies, but on the expectation that productivity gains will eventually spread through banks, insurers, manufacturers, logistics firms, healthcare providers and every other large corporate machine that has been promised an AI overhaul. The market is already paying for the destination while the economy is still standing at the departure gate. The irony is that the software sector, which should in theory be one of the earliest beneficiaries of AI-driven efficiency, has already been punished this year by concerns that the same technology may compress the terminal values of established software businesses. AI may make companies more efficient, but it may also make their existing products less defensible, creating a tension investors are now being forced to confront.
According to Investing.com India, Slok's point is not that AI will fail to improve productivity but that investors may be assuming benefits arrive in a straight line, at an implausibly fast pace, and with a much cleaner payoff than the real world is likely to allow. While software and technology firms can embed AI directly into products, workflows and code bases with immediate benefits, banks, insurers, hospitals, utilities, defence contractors, airlines, manufacturers and government agencies face significant obstacles. These include rebuilding workflows, cleaning data, navigating regulation, managing compliance, retraining staff, redesigning accountability and integrating new systems with legacy infrastructure that may have been welded into organizations for decades. For these sectors, AI is not simply another software update - it often means rebuilding entire systems and processes from the ground up.
The S&P 500 has climbed 20% over the past year, while the Nasdaq Composite has gained more than 25%, including its best quarter in six years. Rising forecasts have kept valuations in check even as indices hit fresh highs, with stocks now trading near 20 times forward earnings, well below the levels hit during the dot-com boom and last year's rally. However, Kasper Elmgreen, chief investment officer for fixed income and equities at Nordea Asset Management, pointed to a thin cushion for error, stating that earnings carry a slim margin of safety heading into the second-quarter reporting season. Investors have also flagged a separate risk, with traders now pricing in at least one quarter-point rate hike by year-end, marking a reversal from earlier bets on multiple cuts, adding fresh pressure to profit assumptions that already look overstretched.
