From time to time, we have featured research by Torston Slok, Chief Economist at Apollo. This week, his analysis of productivity and profitability of the S&P 500 highlights that revenue and margin improvement has not shown up outside the Mag 7.
Slok notes that “despite massive investments and widespread hype around artificial intelligence, the technology has delivered zero financial payoff to corporate America outside of tech. Revenue per worker is rising for the Mag 7 but is flat for the S&P 493.”
Additionally, “profit margins are rising for the Mag 7 but are flat for the S&P 493. And there are still no signs of AI boosting productivity growth. With no impact on the bottom line, mainstream corporate America is pulling back and starting to view token spending not as a source of growth but as a cost center that weighs on margins.”
He notes a trend where “VC-backed companies are spending more and more on tokens, but mainstream corporate America does not need the latest model and is unwilling to pay for it. As long as agentic AI and token spending are confined to a small part of the economy, the macroeconomic effects of AI will be very limited.”
We should all be excited about AI and the future productivity it will add. Repeated warnings from these companies themselves about nefarious usage seems to be falling on deaf ears in Washington. Anthropic is telling investors that advanced AI could pose “catastrophic or existential risks to humanity, as it prepares for a potential $2 Trillion IPO. The warning inside the Anthropic’s IPO prospectus, which was released yesterday, warns that AI models could exhibit “self-preserving behaviours”, including attempts to “resist shutdown”, to “conceal or manipulate information” and behaviour “resembling blackmail”.
Anthropic’s founders said AI could “raise productivity across every sector of the economy”. We ultimately expect the sector will/should have strong regulatory guardrails. Without it, it is dangerous. With it, consumer confidence should improve much broader usage. Currently, the top five clients represent about 25 per cent of revenue. For those that want to read the full prospectus, it can be found here. Anthropic, PBC - S-1 (Q2)
We have highlighted the AIQ and BAI ETFs as two of the better ways to play the sector. YTD, they are about equal, though the active strategy clearly has more upside potential when the sector is hot! Both include the last very hot IPO SPCX.
