Stagflation will derail one of the biggest drivers of the stock market rally next year, Apollo’s top economist says

• Stagflation is one of the biggest risks staring down the Fed in 2026, Apollo’s Torsten Sløk says.

• The scenario, often thought to be the worst-case for the economy, entails slow growth and elevated inflation.

• That risk is one of the biggest obstacles to the Fed cutting rates next year, in Sløk’s view.

A top economist is back with a stagflation warning.

Torsten Sløk, the chief economist at Apollo Global Management, said he believes stagflation is still one of the biggest risks facing the Federal Reserve next year, even as investors breathe a sigh of relief after a light November inflation print.

That risk is jeopardizing a key source of fuel for the stock market rally: the prospect of more rate cuts.

“I still think that stagflation is a risk because there’s still some headwinds coming, especially if AI does not deliver,” Sløk said, pointing to the downside risks to growth and upside risks to consumer prices heading into the new year.

“Given that inflation is very sticky and now has the risk of going up over the next six months, then the key issue for the FOMC becomes: can we even cut in that environment?” he later added.

Stagflation, which is often referred to by market pundits as one of the worst-case scenarios for the economy, describes a situation where growth remains sluggish while inflation remains elevated. That’s a difficult combo for policymakers to respond to, as hot inflation prevents the Fed from cutting interest rates to boost economic growth.

On paper, things seem to be moving in the opposite direction. GDP is expected to have expanded a robust 3.5% over the third quarter, according to Atlanta Fed economists, while inflation cooled to a 2.7% year-over-year pace, per the November CPI report.

But the US’s vulnerability to stagflation is real, Sløk suggested. He pointed to the risk that AI firms will start to slow their spending on the technology, or that the billions they’ve already poured into AI won’t produce the returns investors are expecting.

Meanwhile, the ISM Services Prices Index, one forward-looking inflation indicator, clocked in at 65.4% in November, well within expansionary territory.

Central bankers also seem to be worried about stagflation, Sløk said. The number of FOMC members who said they believed the risks to inflation and unemployment were skewed to the upside far outnumbered those who said they believed risks were skewed to the downside, he wrote in a note to clients this week.

“In other words, the Fed continues to forecast stagflation and is concerned that we in 2026 may experience rising inflation and rising unemployment at the same time,” Sløk wrote.

“The bottom line is, in the next six months, and especially when we get to April, we’ll begin to see some fairly meaningful risks that inflation is still going to be elevated,” he later told CNBC.

The outlook for rate cuts looks dim heading into the new year. The probability that the Fed will trim rates another 25 basis points in January ticked up following the November CPI report, but investors are largely expecting the central bank to keep rates steady at its next policy meeting, with the odds of a cut at the March meeting at just 45%, per the CME FedWatch tool.

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