By Reshma Kapadia

Torsten Sløk, the prominent Wall Street commentator and Apollo Global's chief economist, is known for taking a mosaic approach to the economy, markets, and geopolitics and distilling it into concise takeaways. He thinks investors aren't paying enough attention to the risks of stagflation and market concentration.

Barron's spoke with Sløk while he was on vacation in Denmark. He ticked off three things investors should keep their eyes on.

The Dollar

Stocks have been largely immune to concerns about the fiscal deficit and investors' appetite in continuing to fund U.S. spending. The dollar is the asset to watch.

After weakening in April, Sløk says foreign appetite for the dollar has returned. He is keeping close tabs on foreign investors considering they account for about 30% of Treasury demand.

The dollar had been weakening for much of the year but has steadied more recently. If the dollar weakens markedly further -- which is not Sløk's base case -- it would add to the upward pressure on inflation he already expects from tariffs. Add in weaker economic growth, and Sløk sees stagflation ahead.

The Magnificent Seven

However, Sløk worries the S&P 500 and credit spreads show no signs of the earnings slowdown that would come with stagflation, leading us to the second thing he's watching.

If the economy sinks into stagflation, he sees a risk to the "Magnificent Seven" megacap tech stocks and other stocks tied to the artificial intelligence boom that have dominated the market's direction. That risk may be indirect: If the other 493 companies in the S&P 500 index start to see their earnings slow and costs rise, they could reduce their AI-related capital spending and purchases of services from the Magnificent Seven companies. And that in turn could weigh on the Magnificent Seven, creating trouble for the market.

"You can't have an economy that flies on just seven stocks," he adds.

Concentration Risk

Another concern: Just how concentrated the market is in AI-related stocks. Nvidia accounts for roughly 8% of the S&P 500, the highest single-stock concentration in the index since 1981, Sløk says.

"Page one in the [investment] textbook is that you should be diversified. If you buy the S&P 500, you think you are diversified but clearly that's not the case if almost 10% is in one stock," he says.

Nvidia's stock is vulnerable to several triggers, including trade policy, U.S.-China dynamics, and expectations for AI broadly.

While Sløk says AI is likely to make a big difference in people's lives, he worries investors aren't questioning valuations enough. "Does [the opportunity] mean the price-earnings valuations of the 10 biggest companies should be bigger than in the 1990s? Does it justify any valuation level?"

His two cents to investors: Even if things are going well right now, it's worth keeping an eye on any signs they may take a turn for the worse.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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August 07, 2025 14:54 ET (18:54 GMT)

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