AI spending and state borrowing push global cost of capital higher
Goldman Sachs links AI infrastructure spending and higher government borrowing to a rising global cost of capital, with corporate issuance climbing.
A surge in spending on artificial intelligence infrastructure, combined with heavier government borrowing, is driving up the global cost of capital, as firms lean more on debt and equity markets to finance investment while states borrow for infrastructure, energy security and defence.
The two dominant themes in investor discussions — AI and rising interest rates — are becoming intertwined as demand for capital climbs across both the private and public sectors. In the private sector, a jump in capital expenditure to build out AI infrastructure has eroded free cash flow, pushing companies to raise more from debt and equity markets. Higher government borrowing and inflationary pressure from energy prices have added to the rise in funding costs.
The shift is stark. As recently as 2022, 30-year government bond yields in Germany and Japan were close to zero. Since then, higher yields and greater uncertainty over geopolitics and AI have lifted the cost of capital.
Corporate financing patterns reflect the change. Capital expenditure by AA-rated issuers rose 65 per cent year-on-year in the second quarter — the tenth straight quarter in which aggregate AA capex growth exceeded 35 per cent. Firms have increasingly turned to credit and equity markets: US convertible bond issuance has reached USD 135 billion so far this year, with AI-related borrowers accounting for 44 per cent of that total.
The credit team has raised its full-year forecast for US investment-grade gross issuance by USD 200 billion to USD 2.3 trillion, with AI-related issuers expected to make up about a quarter of US investment-grade gross supply this year.
Higher funding costs could weigh on equities if earnings growth slows. Technology valuations have moderated and sit below their 20-year median globally, but the central question is whether current earnings strength can be sustained. A slowdown in profit growth against a much higher cost of capital could drag equity prices lower.
Earnings growth and nominal GDP growth are expected to remain key drivers of equity performance, while higher bond yields are likely to cap further valuation expansion. Opportunities are seen broadening across geographies, sectors and factors as earnings growth becomes more widely distributed.