Torsten Slok’s Macro Update: Higher for Longer and the Road to 2027

In this September 2026 podcast episode, Apollo's chief economist Torsten Slok discusses significant shifts in the economic outlook. The Fed has reversed expectations from three rate cuts to three rate hikes, surprising markets that entered 2026 anticipating easing. This dramatic reversal reflects two major tailwinds: an AI spending boom contributing approximately 1% to GDP growth (through data centers, energy, software, and tokens) and substantial fiscal expansion adding roughly 1% additional growth.

Slok emphasizes that inflation remains elevated at 3.5% versus the Fed's 2% target, primarily due to three factors: lingering tariff effects, rising oil prices, and wage growth in sectors with immigration restrictions (construction, agriculture, hospitality). He notes this "last mile" of disinflation has proven more difficult than anticipated, with inflation likely remaining above target through the next 12 months.

Regarding AI's labor market impact, Slok disputes fears of mass unemployment, citing record new business formation in the U.S.—the highest in history. While some job displacement may occur, the dynamic economy created by AI is generating more jobs overall, evidenced by strong recent employment reports. However, he acknowledges significant concentration risk: the AI factor dominates returns across all asset classes—comprising 40% of the S&P 500 (the 10 largest stocks), appearing in public credit through hyperscaler debt issuance, and representing 87% of venture capital investments.

Slok identifies three main investor concerns: geopolitical risks and oil price volatility (particularly given depleted global inventories of crude, diesel, marine fuel, and jet fuel), uncertainty around actual AI investment returns and trajectory for corporate profit margins, and U.S. fiscal sustainability given rising long-term interest rates (mortgage rates increased from 2.6% to 7% since the pandemic).

The discussion highlights a K-shaped economy amplified by "everywhere millionaires"—small business owners across the country holding 10 times more wealth than the Forbes 400 list. This distributed wealth base supports consumer spending resilience despite higher interest rates affecting debt-burdened consumers and leveraged companies.

Slok concludes that investors face two primary challenges entering 2027: extreme AI concentration requiring portfolio rebalancing (noting that a 60-40 portfolio from 10 years ago would now resemble a 90-10 portfolio without rebalancing), and the "rates higher for longer" environment affecting asset valuation. He recommends exposure to high-quality private credit and private equity while maintaining growth positioning, particularly focusing on companies capable of servicing higher debt costs.