AI-Fueled Cost of Capital Surge Threatens Equities

Goldman Sachs has flagged a rising global cost of capital, driven by a surge in artificial intelligence (AI) investment and government borrowing. The bank's report notes that AI-related capex has eaten into free cash flows, forcing companies to tap debt and equity markets more aggressively.

The impact is already visible in corporate financing data, with AA-rated issuers' capital expenditure rising 65% year-on-year in the second quarter. To fund this investment, companies have increasingly turned to credit and equity markets, with US convertible bond issuance reaching $135 billion so far this year, with AI-related borrowers accounting for 44% of the total.

Goldman Sachs warns that higher funding costs could put pressure on equities if earnings growth slows. While technology valuations have moderated and are below their 20-year median globally, the key risk is whether the current strength in earnings proves sustainable. The bank expects earnings growth and nominal GDP growth to remain important drivers of equity performance.