Stories
AI Spending, Government Borrowing Drive Up Global Cost of Capital: Goldman Sachs
- •A surge in private-sector AI infrastructure spending and rising public borrowing for energy security, defense, and critical infrastructure has significantly increased the global cost of capital.
- •Goldman Sachs notes that this dual demand for capital has pushed long-term interest rates higher, making equity markets more vulnerable to further rises in bond yields.
- •Despite higher capital costs, strong nominal GDP and corporate profit growth, particularly in technology, commodities, banking, and industrials, have largely offset the negative impact of rising bond yields.
- •The report highlights that equity risk premia have compressed, leaving markets sensitive to bond yield increases, with recent adjustments explaining pullbacks in equity prices.
- •The simultaneous rise in private AI investment and public borrowing creates competition for capital, elevating funding costs and exposing equity markets to further bond yield movements.
Key Questions Answered
A surge in private-sector capital expenditure for artificial intelligence infrastructure, combined with rising public borrowing for energy security, defense, and critical infrastructure, has sharply increased the cost of capital worldwide.
Equity risk premia have compressed back toward late-1990s levels, making markets more sensitive to bond yield spikes. However, strong corporate earnings and nominal GDP growth have largely offset the negative impact of higher rates.
Goldman Sachs identifies technology earnings, commodity sector profits supported by higher energy prices, bank benefits from positive nominal GDP growth and steeper yield curves, and industrial gains from AI infrastructure spillover as the four main drivers of corporate profit resilience.
