Torsten Slok’s Mid-Year Outlook: Three Forces Driving Markets

(upbeat music) Hello, and welcome to another episode of the view from Apollo podcast. Dom Brad Young, head of client content here at Apollo. As we head into the second half of 2026, investors are navigating a market that's been shaped by what's being called an AI super cycle, geopolitical events, rising inflation, and questions around interest rates. Tell us make sense of it all, and what it means for investors, I'm joined once again by Apollo Chief Economist, Torosid Slok, who is here to discuss his mid-year outlook. Torosidin, great to have you with us as always, welcome. Thanks for having me, Brad. I think we should probably start from the beginning. It's been three months since we had you here in the studio. How you feeling? What's the data telling you about where the macroeconomic picture is right now? Well, what's been surprising more recently is that despite some of the hit wins coming from the Middle East and other prices going up, we still continue to get pretty good data. The employment report for me was pretty strong. We also have consumer spending as continuous will be strong. We also have business spending as been very strong. So overall, the economy continues to be quite resilient and actually do quite well. And so if you were to break that down and do a couple of key factors on whether that continues or not into the second half of 2026, what do you point in at as the main drivers for the rest of the year? Well, there are three very important reasons why things are still holding up quite well. Number one, we are having an AI boom. And the AI boom is very helpful. The data center build out is helpful. The energy build out is very helpful for growth. And we also at the same time have the investor of NSONs, which is also helpful for growth. And we also, third and finally, also have the one big beautiful bill, which is also helpful for growth. So we're having a number of factors that are quite unique. The AI boom is quite unique. And the particular one big beautiful bill was the political decision, of course, to support the economy in 2026. It's also helpful. So overall, those tailwinds, they are providing a quite significant fuel to growth and that's why we're quite optimistic for the rest of the year. And I'm sure we'll get to some of the risks for the outlook moving forward. But let's talk about those drivers, those tailwinds. Let's start with AI spending. You've been making the point that AI is much bigger now than a stock market story. >> What makes you say that? >> Yeah, so the key issue is that AI, of course, is a truly revolutionary technology that is making a significant difference in all our lives, almost none of who you are and where in the world you are. Because we're seeing significant improvements when it comes from last-language models. We're seeing agents and agentic AI really take off in a very significant way. And as a result of that, a lot of compute is needed. And when compute is needed, it means that more data centers are needed. And when data centers are needed, it means that energy for the data centers are needed. So there's a very significant tailwind simply because a lot of computing power is needed for businesses, for households. And that's the key source of growth for the economy, namely that we are seeing a data center build out and an associated energy build out that is just unlike what we have ever seen before. So a lot of dimensions around both supply of computing data centers, but also in terms of the demand and the debate more region has been, what is demand in terms of token demand and token demand, more companies and now beginning to organize their token demand in a different way because tokens have become more expensive. So there's a lot of different dimensions to your question in terms of what are the tailwinds and will those tailwinds continue. But as the day, it ultimately ends up being discussion around what is demand for compute going to look like, what is the price of compute going to look like and what is the supply of compute going to look like? It's not going to go away. It will definitely not go away. And for you and me and everyone else who's listening, we will certainly have last language models for the rest of our lives. This is a technology that is truly revolutionary. And that is something that of course becomes very important because it also is an issue around not so much whether this is going to end with a growth rate of 3.4 or 3.7, but more something that also is going to have a very significant impact in how we all work and how we live and exactly on the broader economy and all our lives. When you look at the employment aspect of that, you've written about this a lot lately in your daily Spark newsletter, this idea of Javon's paradox and how that deri relates to what's happening in AI today. What is Javon's paradox and why has it been an area of focus for you in the AI boom? Yeah. When people talk about AI, they normally talk about that it may replace workers. It may replace labor. People are worried about that some task that I do can now be done by a computer and done by AI. And therefore maybe I'm no longer needed. But what is also a very important part of that discussion is not only about the individual task that may be replaced, it's also about the bigger picture of what AI can do for the economy. And AI has created a significant increase in the number of new businesses that are created. It's also the creator that has significant increase in number of businesses that are created by solo founders, meaning individuals, many one person creating a new business. And that effect of creating more businesses, creating more jobs is more than dominating the negative effect of those who lose their jobs. So yes, maybe some people in cold centers will be losing their jobs. But at the same time, we'll probably get a lot more cold centers created. Likewise, we saw with radiologists 10 years ago who was predicted that maybe MRI and CAT scans, they were going to make it a lot easier to do these scans. So as a result, we now have a lot more scans. And as a result, we also have a lot more radiologists. So that's why when you have a technology that gets cheaper and gets more effective and efficient, it also really creates much more demand for that technology. And that is the core of the Javans paradox, namely that there is significant demand now coming because AI has made it so much easier. That's why in consulting, we'll probably see more businesses created and we'll see more demand in finance services and also in legal services because of this simple idea that there's a lot more people who now open businesses in these different sectors and that will therefore create a lot more jobs. So that's why when we look at the latest in private report, it was very, very good. And we are still not seeing all these job fears playing out because instead, I continue to believe that this will be positive for employment because people are ignoring the fact that this is not only about displacing individual jobs, it's really about the much bigger opportunities you set that comes along with the AI technology. You've been good about articulating both sides of the AI story. Always, right? It's a potential risk, but you seem pretty bullish on it overall and it's impact on economies and jobs. I think also what is exactly important about that is that there are some distribution consequences. Those who have a job that is going to get impacted by AI, they of course will feel that this did. Quarant could take my job, but this did indeed replace some parts of jobs or works or tasks that we used to do. But on the other hand, those dumb entrepreneurs who are now inventing new businesses, they will see this as a huge opportunity. But what will come along instead is the significant boom because it creates a whole new opportunity for you and me and everyone else to say, well, now I can do a business plan using a last-language model. I may be using agents to do some work for me. So I think that that effect will be much more positive. But that's what people are putting up on this scale at the moment. Some people were more about the job displacement, which we'll be focusing on is all the opportunities that come along from a business creation perspective as a result of the AI tools that are now becoming available. Let's move on then to the second part of this. And it's somewhat related, actually, as this idea of an industrial renaissance. When you talk about an industrial renaissance driving macroeconomic growth and being a tailwind, what do you mean by that? Yeah. In the last 20 years, we had first, of course, the phenomenon that there was globalization, especially the sense China into the WHO in 2000. And when that happened, of course, we had a lot of manufacturing capacity. Basically, it was moved out of the US, including to China and to the rest of the world. Now, over the last five years or so, we have seen a significant reversal of the globalization trends. This came first in the US with a chips act on the Biden in 2022, whether it was a strong political willingness to say, we have to do home-shoring of chips and home-shoring of production of manufacturing of semi-conductors. This created a dramatic boom in manufacturing capacity, specifically of semi-conductors. So this was the first prime example of industrial policy, namely bringing back production of manufacturing capacity in a sector that we had not had for a long time. Now, we, of course, also have a lot of home-shoring coming from pharmaceuticals, coming from defense, strategic sectors that politicians, both Republicans, Democrats think are very important that we need to bring back to the US. This is very, very important for financial markets, because this needs to be financed. This will be financed in particular. These are long duration assets that can be matched with long duration liability. So it all is about creating more production capacity and that all again requires financing. And those types of increases in capacity are really essentially the industrial renaissance that is coming back to, in particular, the US and Europe. So let's connect the two things together, right? The AI trend and then the industrial renaissance trend. You've talked about AI as a pixel shovels opportunity and pixel shovels, of course, goes back to the gold rush and it wasn't about the gold, it was about the picks and the shovels. So talk a little bit about why you think that and how those two things come together. Well, that's why building the infrastructure, both in hardware and services is, of course, an important part of the AI build out, because that is exactly the pixel and shovels compares, and exactly as you're saying, with a gold rush, that there is indeed a need to build computing power and in very plain English, when we have that computing power, we can discuss who is using it and what price, but there can be no doubt about it that we are all using, open AI models, we are all using, and thrupping models at our phones, and these models, of course, require compute and can be no doubt about it, both for consumers and for firms, that this will just continue to grow. So as a result of that, there will be huge demand for data and there will be huge demand for compute for the next 5, 10, 20 years, and that is the parallel to the picks and shovels, to the gold rush, naming that those investments in infrastructure and services that provide the basic core highway for AI is likely going to be the more interesting parts from an investing perspective. >> Yeah, and I think when you type a query into your phone and you get it back in a second, you don't rest, necessarily realize all the infrastructure behind the scenes that are making that possible. >> And there's also very importantly, exactly that discussion around well, where then now the possible in the future, does it have to go to a data center? Can it be only on the phone? Can it be so? other local entities that could provide the answer. And if it just is done locally, then maybe we don't need token demand to be so high. So now there's also token prices globally, have also seen more supply of the computing power coming from China. There's also of course, data centers to be building Europe. So we will have to wait and see exactly how the field plays out. Beyond AI, what other sectors is that really manifesting itself? We've talked a little bit about healthcare, pharmaceuticals, I should say, semiconductors, defense, like where you've seen it. Yeah, so exactly those sectors are the prime areas where we're seeing growth. It is really the strategic decisions that politicians have taken about what do we need to now have produced domestically. So that is exactly more and more coming into areas such as defense, of course. We also have more focus on energy, especially renewable energy. That particular is becoming more important, including in Europe. And we also seeing more and more, of course, focus on prescription drugs, pharmaceutical things, broadly speaking, things that people politically begin to say, well, maybe we should produce this at home rather than producing this abroad. And those are from an investment perspective. Those are the sectors that generally have the most tailwind at the moment. Do you think it's being appreciated to the level it should be by investors? Do you think we're all getting our heads around just the nature of what you're talking about from a Renaissance perspective? The challenge with it, industrial Renaissance is namely that this is a longer term theme. So it's not something that's this quarter, red, it's the last quarter. So a lot of this also rests on what our politicians going to do going forward because this in the broadest terminology is really truly industrial policy, which we hadn't had for a long time. For many decades, it was the case that globalization said countries should not have industrial policy, which would just get goods where they're the cheapest. And now it's become more acceptable and it's become more okay for politicians to begin to say, well, we shouldn't really get it where it's cheapest. We should get it in where we are sure we actually get it in particular in situation where we have a conflict with some other countries. So that's why countries are not willing to say, well, let's produce this domestically, even if it's not economically the best idea, but we're willing to do that because we're on the risk that if we're not able to get defense prescription drugs, AI or compute, then we will have a serious problem. So that's why politicians are basically willing to say we are ready to pay a higher price for these manufactured goods or these services, but it has now to be produced domestically so that we can get it at any point in time in particular, geopolitical conflicts come up. And that's a good segue to the third factor that you talked about in terms of the tailwinds we're looking at. And it is around government policy. Specifically, the one big beautiful bill is playing a role in supporting US growth right now. Talk a little bit about how that's been manifesting itself. Yeah, so the one big beautiful bill had two very important provisions. Number one, it lower taxes for households. So tax refunds last year was around $3,000 and because taxes were lower retroactively, that means that as households have been filing their taxes this year and also having extension, they'll file it over the summer. They will be experienced attacks refund on average around $4,000. So more than $1,000 per household in the US as a result of the one big beautiful bill given that's more than 130 million households in the US. That means that we'll have more than $100,000, $130,000 in extra consumption over the next two or three quarters. That's a consumption side. That's going to be very helpful. We already seeing this consumer spending has been relatively strong again in the last several months. Likewise, we also have a second provision that's also helpful for the economy and that is that now companies can do 100% immediate expensing. That means that if you and I were to build a factory across the street, we could write that down in our taxes 100% in 2026. Normally, if we build a company, we have to write it down over the next five to 10 years from our taxes. But now the one big beautiful bill allows us to do that immediately. So that is also incentivizing me and you and others to go out and build a company and build a factory and that will also be good for GDP growth. And that also fits with the two other forces that helps, of course, also in the data center build out that also helps on the industrial renaissance. So it was intended to boost the economy in 2026, not only on the consumer side, but also on the capex side for company spending and the congressional budget of this estimates that these two forces together will lift GDP growth this year alone by 0.9. So if we estimate that the AI spending boom will lift GDP by 1%, the industrial renaissance 0.3 and the congressional budget office estimates that the one big beautiful bill will lift GDP by 0.9, that gets as well above two, which is a long-run growth rate for the US economy. So that's saying that even on its own, these components of GDP, namely AI spending the one big beautiful bill and the industrial renaissance are on their own delivering quite strong growth in 2026. And that's why we're beginning to worry more about not so much stackflation, which would normally be the response to the conflict in the Middle East, but really beginning to worry more about the risk of overheating, meaning inflation potentially the beginning to move up as we look into the rest of the year. So talk a little bit about that then with all of these factors, rates, inflation, how is all of this influence that picture? Yeah, so the outlawful inflation is driven by three forces, the economy is strong, we have upward pressure inflation is still delayed from tariffs and we also have upward pressure inflation coming from any deprizes. And this is why markets at the moment are having this debate about should they fit, how should they not hide, what are they going to do later this year? Well, remember the Fed's target is that inflation should be two. And today as we speak, inflation is not two, it's actually closer to four. So that's why given two is not four, that means that the 12 voting members of the FMC of course have continued to signal that we are worried that inflation is just not quite back in the bottle the way that we would like it. So that's why the Fed has continued to communicate that we can't quite cut interest rates because inflation is just unfortunate is still a problem. And when inflation is still a problem, when inflation is higher for longer, that means that interest rates will be higher for longer, that means that yield levels in credit will also be higher for longer. And that raises a lot of questions and opportunities also at the same time about, okay, if we have a higher interest rate environment, what success of credit markets should we be looking at? Software and particular is vulnerable because they happen to have in the software sector a lot of debt and very low coverage ratios, many high vulnerability to higher interest rates. But it also raises questions around if interest rates are going to go up, how much are they going to go up? And if they do go up a lot, well then of course that also begins to become an issue for the economic outdo. So we are worried about the upside pressures on interest rates in particular because of inflation staying higher for longer and come therefore to the conclusion as a result interest rates will also have to stay higher for longer. Let's stay with that then for a second, all of this and what it means for asset allocation and portfolios. How do you see all of that? How should investors really be trying to channel all of this into some decisions around asset allocation? So the first conclusion is that if the Fed says that they want to keep interest rates high on also another scenario, want to even race interest rates, we as investors should view that as they are telling us you should be putting more money into fixed income. You should be putting more money into basically things that caught coupons and give you a cash flow because we are now interested in raising interest rates to make it more attractive to food money into fixed income with a simple view that we don't want you to take as much risk. So one first important conclusion is when interest rates are high and risk are moving higher, it is very important to focus on cutting coupons to fixed income and really doing what the Fed wants us to do, namely put money into products such as credit and rates and things that give every turn based on the simple view that they are not having us put money into more risk. Yes, it's just equit or save income. So the second conclusion is when interest rates are higher for longer, it does become important when you let new under the hood and credit to then think about which sexist and credit is it that are more vulnerable when interest rates are higher for longer. And software stands out as a sector that is just more vulnerable to interest rates are higher for longer because software happens to be a sector that has very high leverage and has at the same time a very low coverage ratio. A coverage ratio of course measures my earnings divided by my debt servicing cost. So if I have high debt servicing cost, my coverage ratio is low. So it means that the software sector is not only vulnerable because of AI disruption, but it's also vulnerable because of interest rates staying higher for longer. So the second conclusion is it's not only about cutting coupons in fixed income because you'll say higher, it's also about looking at which sexist and fixed income is it that are more vulnerable when interest rates are higher for longer. And the third and final investment implication is also about well if interest rates are higher for longer in equities and including in private equity, it becomes important then to actually invest in companies with earnings. I know it sounds a little bit funny, but if you have higher debt servicing cost because we're interested rates are higher for longer, debt servicing cost will also be higher for longer. It becomes very important to invest in companies that have earnings that can service the higher debt servicing cost. That is generally speaking, last cap companies, that is generally companies that have more diversified business lines, but basically companies, both in private equity and in public equity, that are able to pay the higher debt servicing cost because if you're in companies that don't have any earnings, of course you will have a problem when their debt servicing cost go up when interest rates are higher for longer. So in equities, it also becomes important to focus on value investing and investing in businesses that have earnings and therefore ability to pay for the higher debt servicing cost. So in summary, when the economic outlook is good and interest rates are going up, there are three interesting things to do as an investor. Number one, make sure you are in fixed income because the Fed wants you to be in fixed income to get a higher yield. Number two, make sure you are in the sex us in fixed income, incredible in particular, that actually can survive when yield levels are higher. And third and finally, same thing in equities, make sure you are in the sex us in equities and the companies in equities that actually are also able to survive with debt servicing cost higher. That's great and I think that's good guidance. And as we conclude here, we'll have you back in December as we always do and we'll probably have you back before then. And who knows what it looks like when we're in. Exactly. And I would never ask you to try to predict that the way things change so quickly anymore. But I guess the question is, what would really materially need to change for your outlook to materially change? What would you need to see to change where your head is right now? If we think about the three engines of growth, the AI boom will for sure also be here in six months time when we see it again is indisputable, we need more data center, we need more compute, we know energy associated with that so the AI boom will very slightly still be a very strong engine of growth. They transfer of any signs. This is again, as we spoke about a weaker engine of growth, but I still think that this is also very clearly for the next many years. Politicians want to do home-shoring of strategic manufacturing sectors. The one big build for Bill on the other hand will begin to run out of steam because that was designed to boost growth here over the middle of 2026, so that engine of growth will potentially be weaker. So that becomes a question of when we sit down again in six months time, okay, the duration of these engines of growth becomes a matter of, okay, can they continue to support growth going into 2027? But my best guess at this stage is that we will still have strong growth when we sit down here again and talk about the outlook for 2027. And any risks that you think that people might be underestimating over the next few months they should keep an eye on. I think the homework for all of us in investing is to spend as much time as we can on understanding AI and how it is impacting us in the all many different dimensions that come along with that. It's not only about the data and the build out, but also our valuations at the moment, the right ones are they too high, are they too low? Is it the picks and shovels theme that will continue to do with this? Well, of course, what in my view is the most likely scenario, but are there other avenues and other impacts that we have seen as a result of AI where we may have seen the bubble features or are there areas where we may have seen underinvestment? The opportunities to sit around AI is just enormous. And that's why the homework around finding those opportunities becomes absolutely critical. That's great. And the daily sparks are a good place to do that homework. So, yeah. I'm not a subscriber already. People should maybe get that a look. So thank you as always, Torsten. As we sit here in June, there's one more forecast that I'd like to ask you about. You are a big football guy, European football, of course. Your native Denmark unfortunately did not qualify for the World Cup this year. Sorry about that. I know it was a very painful loss. You love the game, though. And it's descending on our area here in New York, World Cup fever. Any predictions? Anything you're watching for? There's been a lot of predictions whether Spain would win, whether Argentina would be winning. It's still a very exciting tournament. And we're, of course, getting closer to the finals as we're speaking. But yes, I do watch that. And that's a very important part of my life when I don't think about AI and the three tailwinds to growth. Of course, New York City boiling over in the hot summer with this. And it has, of course, been a lot of fun. I think the World Cup might be the only thing the AI can change. So, it's been fun to watch. But thank you as always for being with us, Torsten. Always is really good to get your views and we'll make sure to continue to watch them with you over the coming months. And thank you all for listening to this episode. If you want to learn more about Torsten's views on what to expect in the second half of 2026, you can check out his recent mid-year outlook class on demand at ApolloAcademy.com. And you can follow all of Torsten's insights there. So thank you again for listening in. And we'll talk to you all again soon. This podcast was recorded on June 8, 2026. Thanks for listening. A quick reminder that you can subscribe to this podcast on Spotify, Apple Podcasts, and Audible, or by visiting ApolloAcademy.com. Our educational website dedicated to alternative investing, where you can also sign up to have Torsten's Daily Spark Economic Blog delivered directly to your inbox. Once again, thanks for listening. 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