If AI Returns Fall Short of Expectations, Could It Push the Economy into Recession?

According to MarketWatch, AI has become a key driver supporting the global economy and financial markets. However, Apollo Global Management believes this has placed markets in a highly fragile state.

In a recent report, Apollo's Chief Economist Torsten Slok stated that if returns on AI investments do not materialize as quickly as the market anticipates, the consequences will not be limited to the technology sector—they will become "a problem for everyone."

Based on Slok's analysis and data from FactSet, the market currently expects the combined free cash flow of the four major cloud providers—Alphabet (GOOGL-US), Meta (META-US), Microsoft (MSFT-US), and Amazon (AMZN-US)—to grow more than fourfold between 2026 and 2030.

However, Chinese models are now gaining greater traction among the world's top 50 most-used AI models. In terms of token usage, Chinese models are also steadily improving, currently outperforming their U.S. counterparts in the top 20 rankings.

Slok's report suggests that due to these trends and the potential risk of declining token prices, free cash flow growth may not be as strong as currently projected.

Slok adds that even if AI-generated cash flows fall short of expectations, the massive capital expenditures already planned by companies will still proceed as scheduled. The resulting depreciation expenses will also appear on financial statements, further squeezing profit margins.

In such a scenario, he warns of a potential large-scale sell-off of the "Magnificent Seven" tech stocks. Given their high weightings in the S&P 500 index, the broader index could also come under pressure.

"When such enormous market expectations are concentrated on just a few companies, a slowdown in AI investment returns won't just be a tech industry problem—it could push the economy into recession and send the S&P 500 into correction," Slok wrote.

The scale of AI investment is staggering. According to BofA Securities, the four major cloud providers among the Magnificent Seven have already committed approximately $234 billion in capital expenditures this year.

BofA also forecasts that the combined free cash flow of Amazon, Alphabet, Meta, Microsoft, and Oracle (ORCL-US) will turn negative over the next 12 months—the first time since at least 2007.

However, not all analysts share Apollo's pessimistic outlook. Brendan Burke, Research Director at Futurum Equities, argues that the rapid adoption of open-source AI models in China actually demonstrates continued strong demand for AI inference, which will drive major cloud providers to keep investing in cutting-edge AI technologies rather than scale back.

He notes that the real risk for the four major cloud providers is that other AI labs may eventually build their own computing infrastructure, reducing reliance on existing cloud platforms. Even so, he believes free cash flow will simply be redistributed among different suppliers rather than shrink overall.

Giuseppe Sette, President of AI investment analysis firm Reflexivity, believes that falling AI token prices are not necessarily negative and could actually benefit the broader AI industry.

"If token prices fall, people will use AI more. The tech industry is accustomed to deflationary environments and responds by continuously innovating," he said.

Sette views the tech industry as inherently "deflationary." Whether software or hardware, prices typically decline over time.

"First, new products continuously replace old ones. Second, new technologies emerge that solve previously expensive and difficult problems at a fraction of the cost," he explained.