AI Spending and Government Borrowing Drive Up Global Cost of Capital

A surge in private-sector capital expenditure to fund AI infrastructure across major economies has sharply increased the global cost of capital. This is due to a combination of factors, including the rapid build-out of AI infrastructure and rising public borrowing for energy security, defense, and critical infrastructure.

According to Goldman Sachs' latest strategy note, two dominant themes are currently shaping investor conversations: the impact of artificial intelligence and the rise in interest rates. The bank argues that these two forces are closely linked, with private companies investing heavily in AI infrastructure and governments borrowing more to upgrade critical infrastructure and secure energy supplies.

The combination has lifted the cost of capital across markets, with long-term interest rates rising after a prolonged period in which equities significantly outperformed bonds. As recently as 2022, 30-year government bond yields in Germany and Japan were close to zero, but those levels have risen meaningfully since then.

Goldman Sachs notes that the impact of rising yields depends not only on their level but also on the speed of the adjustment. Historically, stocks have generally generated positive returns alongside rising interest rates unless the pace of the increase exceeded roughly two standard deviations.