The Daily Spark

Corporate pensions are fully funded again for the first time in almost two decades, see chart below.

With rates still high, plans can lock in attractive yields now by replacing return-seeking assets with liability-matched fixed income and guard against the risk that falling rates during the next downturn reinflate their liabilities and erase the surplus.

The first chart below shows that so far there are no signs of profit margins rising outside the tech sector. This is ultimately what we are waiting for, because the value of AI companies today rests entirely on the promise that margins in the S&P 493 will eventually climb.

That promise is the link to current market prices, since implicit in the valuations of AI companies are assumptions about future earnings. That's why the current debate about token costs, model routing and token marketplaces is important. If token costs converge toward zero for most AI use cases, then there is not enough revenue for all hyperscalers even in a situation where compute demand surges higher. For more discussion, see also this great piece from my colleagues in Apollo Thematic Investing.

The key issue is the length of the ROI runway outside the tech sector. In a handful of sectors, software and tech above all, implementation is nearly immediate, since these firms can fold AI into their own products and processes overnight. But that is the exception. Across most of the economy, and especially in capital-intensive, heavily regulated sectors, deep process re-engineering and data governance requirements could delay structural productivity gains well beyond what the market currently projects. The list of slow-moving sectors is long, spanning health care, banking and insurance, energy and utilities, defense and aerospace, pharma and life sciences, manufacturing, transportation and logistics, construction and real estate, education, legal and the public sector.

This creates a dangerous divergence between aggressive, front-loaded valuations today and a much slower cash flow reality, since equity markets priced for instant earnings growth will face a painful repricing if the productivity hockey-stick takes five years rather than five months, see the second chart below. Put differently, companies will slow their AI spending if they don't see ROI quickly, and the current focus on token optimization is an early warning that AI implementation could be a bumpier, slower road than expected.

The bottom line is that a mismatch between current earnings expectations and the actual time firms need to generate ROI on AI investments could have significant implications for many AI company valuations today.

Trade policy uncertainty continues to decline, and the Strait of Hormuz is reopening, see charts below. This is all bullish for business planning and hiring.

The decade-long case for growth rested on the Mag 7 out-earning everything else, but with earnings growth converging toward the S&P 493 and their valuation premium compressing, the setup increasingly favors value over growth.

Our chart book (available here) covers the Mag 7's recent underperformance, their index share, converging earnings, the hyperscaler capex and data center buildout, and market valuations.

The tokenized real-world asset market has grown to nearly $32 billion, highlighting increasing institutional adoption of blockchain-based asset infrastructure.

US Treasuries (47%) and private credit (19%) account for approximately 66% of the market, emerging as the dominant use cases for asset tokenization.

For more discussion, hear my colleague Christine Moy talk about how tokenization is shaping the future of investing and private markets on this podcast here, and read her paper here.

Looking at a broad set of supply chain indicators shows some mild signs of distress, with rising freight rates by container, truck and air. See the charts below and in our chart book available here.

Higher rates since 2022 raised the pressure on leveraged borrowers, and that pressure is landing hardest on smaller funds because they lend to smaller, weaker companies and hold less diversified portfolios, leaving little cushion when individual credits deteriorate, see the first chart below with data from MSCI.

The negative effect of higher costs of capital is particularly pronounced for funds investing in software companies, because they have higher leverage and lower coverage ratios, see the second chart below.

For more discussion, see the MSCI outlook for private markets here.

The narrative in markets is changing from “lower oil prices mean lower inflation” to “lower oil prices mean more demand in an already overheating economy, which means higher inflation.”

This breakdown in the correlation between rates and oil prices can be seen in the chart below.

Driven by the strong April CPI, hot May non-farm payrolls and a hawkish Fed, the market narrative now suggests that the reopening of the Strait of Hormuz will further overheat the economy, forcing the Fed to raise interest rates soon.

Here are the top three macro questions for investment committees today:

1) Middle East: What are the implications if some tanks reach critical levels somewhere in the world, including distillate fuels in the US? See the first chart.

2) AI: What happens if companies start limiting their token budgets meaningfully because they are only seeing weak ROI, and as a result, compute demand either slows down or shifts to Chinese models? See the second chart.

3) Inflation outlook: With inflation trending higher, what are the implications for equity and credit markets if the Fed hikes in September and December, as currently priced in fed funds futures? See the third chart.

Join me today at 2:00 PM ET for our 2026 Mid-Year Outlook — a discussion covering current economic headwinds and tailwinds, what's influencing inflation and interest rates, the growing role of AI and the broader implications for markets and the global economy. Register now: 2026 Mid-Year Outlook - Apollo Academy

The 2022 gap between European and US CCC spreads has refused to close, driven by Europe’s harsher energy shock, weaker growth and lower government bond yields. This has been amplified by composition, as Europe’s CCC basket is concentrated in the very sectors the shock hit hardest, including energy-intensive industrials, chemicals, autos, real estate and retail.