A Goldman Sachs report found that growing investment in artificial intelligence infrastructure, combined with increased government borrowing for defence, energy security, and public works, is driving up the worldwide cost of capital as both corporations and states tap debt and equity markets at a greater rate.
According to the document, the two focal points of investor conversation — artificial intelligence and elevated borrowing costs — are becoming more intertwined as appetite for funding grows across both private and public markets. Increased capital expenditure on artificial intelligence infrastructure has weighed on free cash flow across the private sector, prompting businesses to seek additional funding through debt and equity markets.
Elevated public sector debt and upward pressure on energy costs have each played a role in pushing borrowing expenses higher. Data from Goldman Sachs shows that 30-year government bond yields in Germany and Japan remained close to zero as recently as 2022, with higher returns and growing uncertainty tied to geopolitical developments and artificial intelligence having since driven borrowing costs upward.
Spending on capital investment among AA-rated bond issuers climbed 65 per cent compared with the same period a year earlier in the second quarter, extending a run of ten straight quarters in which total AA-category capex growth held above the 35 per cent threshold. Businesses have grown more reliant on debt and equity financing to support their investment activities.
Convertible bond issuance in the United States has totalled USD 135 billion through the year to date, with borrowers tied to artificial intelligence representing nearly half of that figure at 44 per cent. The bank's credit analysts have lifted their annual projection for investment-grade gross issuance in the United States by USD 200 billion, bringing the total estimate to USD 2.3 trillion, with entities linked to artificial intelligence accounting for roughly one quarter of that supply.
Elevated borrowing costs may weigh on stock valuations should corporate earnings growth begin to decelerate. Although technology sector valuations have eased and now sit beneath their two-decade global median, the central question identified in the report is whether the present earnings momentum can be maintained over time.
Reduced earnings momentum, against a backdrop of elevated borrowing costs, has the potential to weigh on share valuations. The bank anticipates that profit growth and nominal economic output will continue to underpin stock market returns, though elevated bond yields are expected to constrain further expansion in valuations.
The institution noted that investment prospects were expanding across regions, industries, and asset factors as profit growth became more broadly shared.
