Wall Street Too Optimistic About AI Sector Earnings. Apollo Global Management Warns: If Earnings Fall Short of Expectations, It May Trigger Systemic Risk Across the Entire Market.

Tradingkey - Following Morgan Stanley's optimistic view that capital will rotate to hyper-scale cloud computing giants, economists at top asset management firm Apollo Global Management warned in a report that if the monetization of AI investments is slower than market consensus, it could spread from the tech sector into systemic risk for the entire market.

Recently, Morgan Stanley stated that while the AI sector remains the consensual main theme of this U.S. stock bull market, market concerns over high sector concentration, rising valuation premiums, and the monetization efficiency of massive AI capital expenditures continue to intensify. In the short term, Morgan Stanley prefers the risk-reward profile of hyper-scale cloud computing providers over the semiconductor sector. It also expects that, dragged down by recent sluggish stock price performance, leading cloud giants will gradually revise down their capital expenditure guidance.

However, the Chief Economist at Apollo Global Management believes that Wall Street's current earnings expectations for the AI sector are extremely optimistic, with consensus expecting that free cash flows for hyper-scalers operating global data centers will more than double by 2030.

The firm highlighted two risk factors: first, the continuous decline in token prices, which is rapidly eroding the unit price premium of computing power services.

Additionally, the rapid rise of Chinese AI models, whose market share and token usage among the global Top 20 models have already surpassed those of the U.S., will further squeeze the profit margins of leading players due to changes in the global competitive landscape.

With these two factors combined, the earnings forecasts for hyper-scale cloud service providers may prove to be overly optimistic.

The firm further warned that if the "Magnificent Seven" tech stocks, consisting of Amazon ( AMZN ), Microsoft ( MSFT ), Meta ( META ), Nvidia ( NVDA ), Apple ( AAPL ), Tesla ( TSLA ), and Alphabet ( GOOGL ), experience earnings and cash flows that fall short of Wall Street expectations, their stock price declines will drag down the entire market.

At the same time, the decline will not be confined to a single sector but will spread along the supply chain to upstream and downstream sectors such as chips, power, and data centers, ultimately dragging down the entire S&P 500 index. A deep correction in mega-cap stocks would not only hit capital markets but could also further transmit to the real economy, potentially even triggering recession risks.