Is AI Overhyped? Apollo Economist Sees "Zero Financial Payoff" Beyond Tech Companies

Artificial intelligence (AI) is the biggest story in the stock market. Major tech companies are investing hundreds of billions of dollars to develop advanced AI models that they hope will power a new generation of economic growth. If it works as expected, AI could create a more prosperous future. But what if AI doesn't pay off?

Apollo Global Management Chief Economist Torsten Slok published new research on Saturday that made a bold (and bearish) statement about the future of AI. Despite widespread AI hype, Slok's analysis finds that AI technology has delivered "zero financial payoff to corporate America outside of tech."

Let's look at what this new Apollo research might mean for AI stocks -- and how you should invest if you're bearish about the AI boom.

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Apollo's Torsten Slok: AI is paying off for Magnificent Seven, but not the rest of the index

The seven major tech companies that have driven much of the stock market growth in recent years are known as the Magnificent Seven. Several Magnificent Seven companies, such as Alphabet, Microsoft, and Meta Platforms, are heavily involved in the AI trade. They are investing hundreds of billions of dollars in data centers to power models for popular tools like Google Gemini, Microsoft Copilot, and Meta's Muse AI agent.

The big long-term hope behind the AI boom is that these massive investments in AI computing power will pay off with big corporate profits. If AI pays off, many companies will be able to use AI agents and models to improve their processes, reduce costs, and boost profitability.

But according to Apollo's research, that might not be happening yet. Apollo economist Torsten Slok wrote that revenue per worker and profit margins are rising for the Magnificent Seven, but both are flat for the other 493 companies in the S&P 500 index (SNPINDEX: ^GSPC). If AI tools were really creating the kinds of business efficiencies and process improvements that AI enthusiasts expect, we would already be seeing more widespread gains, beyond just the Magnificent Seven companies.

Major tech companies that build semiconductors for data centers and that sell AI tools are profiting from selling AI. But what if AI isn't good for business for anyone else?

How should you invest if AI doesn't pay off?

If Apollo's analysis of the AI boom is correct and the current trend holds, this could be a sign that today's highly valued tech stocks are overpriced. There might be a tech stock sell-off on the horizon if companies cut back on their AI spending or if investors worry that AI won't deliver widespread economic gains.

There's no guarantee that this will happen. Other forecasters have been more optimistic about AI. For example, Vanguard research suggests that a wide range of companies across industries -- not just tech stocks -- might benefit most from the long-term gains of adopting AI.

But if you agree with Apollo's research and worry that corporate America is spending too much on AI with too little to show for it, you might want to avoid tech stocks. Buying a more broadly diversified S&P 500 exchange-traded fund could be a "safer" bet than a tech-heavy ETF.

In the long run, buying an S&P 500 index fund is generally a good investment. For example, over the past five years, the Vanguard S&P 500 ETF (NYSEMKT: VOO) has delivered annualized returns of about 13.8%. This strong return includes the 2022 bear market, when the S&P 500 was down about 18.2%.

If AI turns out to be overhyped and only beneficial to the companies that are selling it, that could be bad news for tech stocks and tech ETFs. If you believe in this bear case for AI, you might want to diversify your portfolio away from tech. That doesn't mean the broader market will be safe from an AI bust -- the S&P 500 includes major tech names. But based on recent history, S&P 500 ETFs like VOO would likely see a smaller decline in value than tech ETFs in the event of an AI stock market crash.

Ben Gran has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Microsoft, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.