AI spending and govt borrowing are driving up the global cost of capital: Goldman Sachs

New business data points to the fact that A surge in private-sector capital expenditure to fund AI infrastructure across major economies, combined with rising public borrowing for energy security, defence and critical infrastructure, has sharply increased the cost of capital worldwide. It has left equity markets more vulnerable to further rises in bond yields, Goldman Sachs' latest strategy note explained.

The dual demand for capital from both firms and governments has pushed long-term interest rates elevated after a prolonged period in which equities significantly outperformed bonds.

Goldman Sachs Global Investment Research argues that two dominant themes are at present shaping investor conversations: the impact of artificial intelligence and the climb in interest rates. The two are closely linked.

On the private-sector side, a rapid build-out of AI infrastructure (data centres, chips, power and related facilities) has eaten into free cash flow at many large firms. This has forced them to mobilize more capital through both debt and equity markets. At the same time, governments are borrowing more heavily as policy priorities shift toward upgrading critical infrastructure, securing energy supplies and strengthening defence capabilities. Cyclical inflationary pressures fuelled by elevated energy prices have further noted further upward pressure on policy rates.

The combination has lifted the cost of capital across markets. As recently as 2022, 30-year government bond yields in Germany and Japan were close to zero. Those marks have risen meaningfully, and greater uncertainty around geopolitics and the long-term economic impact of AI has compounded the effect.

Equities more exposed after a long outperformance run

This climb in yields comes after a near-record period of equity outperformance relative to bonds over 10-year holding periods. As equities continued to outpace bonds, equity risk premia compressed back toward marks last noted in the late 1990s, leaving markets more sensitive to any further gain in bond yields.

Goldman Sachs notes that the impact of rising yields depends not only on their level but additionally on the speed of the adjustment. Historically, stocks have generally generated positive returns alongside rising interest rates. Unless, the pace of the gain exceeded roughly two standard deviations. A move of that magnitude in US 10-year yields would equate to around 50 basis points over a month or 30 basis points over two weeks. Recent adjustments have been in that range, which helps explain the pullback in equity prices.

Earnings expansion has so far offset elevated rates

Despite the elevated cost of capital, nominal GROSS DOMESTIC PRODUCT and corporate earnings expansion have remained firm. Until recently, the negative impact of rising bond yields was largely offset by the resilience in earnings. Across major regions, earnings expansion has been the primary driver of equity returns during the past 18 months. Price-to-earnings multiples have either stayed flat (Japan and Europe) or declined (the US, Asia and emerging markets).

In the United States, the forward PE multiple for the S&P 500 has come down from around 22 times at the start of the year to roughly 19 times (in line with its longer-term average) even as the index has traded near all-time highs.

Interestingly, the geographic leadership of equity markets has additionally shifted. While US equities dominated returns for much of the 15 years after the global financial crisis, performance since 2025 has been broader. The US market has actually been the weakest of the major regions over that period, increasing the potential benefit of geographic diversification.

Four drivers of the earnings resilience

Goldman Sachs identifies four broad areas that have underpinned the resilience in corporate earnings:

Technology earnings have remained robust. Elevated energy prices have supported earnings in the commodity sector.

Banks have benefited from positive nominal GROSS DOMESTIC PRODUCT expansion, steeper yield curves and healthy private-sector balance sheets. Industrial firms have advanced from the spillover of AI-related capital spending into the “picks and shovels” of the infrastructure build-out.

The breadth of this earnings expansion, the bank argues, has additionally increased the opportunity for market participants to diversify across both sectors and countries.

The simultaneous climb in private AI investment and public-sector borrowing needs is creating a genuine competitive pressure for capital. This has already lifted the cost of funding and left equity markets more exposed to further moves in bond yields. While firm earnings have so far provided an important offset, the combination of elevated rates, compressed equity risk premia and elevated uncertainty means market participants need to stay attentive to the speed and sustainability of any further climb in yields.