Goldman Sachs Takes a Clear Stance: This Is the Largest Capital Demand Cycle in Human History, and the Fed Is Merely a Spectator

As AI, reindustrialization, defense restructuring, and sovereign debt simultaneously compete for capital, Goldman Sachs believes this battle for capital will rewrite investment paradigms—while the Federal Reserve is merely a spectator in this grand drama.

For the past few decades, the backdrop of the global economy has been "excess savings"—abundant capital, low interest rates, and money struggling to find productive outlets.

That era is coming to an end.

Mark Wilson, Head of European Hedge Fund Business at Goldman Sachs, stated bluntly in his latest weekly report: "We are in the most capital-hungry investment cycle in history."

The drivers are not singular. AI infrastructure construction alone is extremely capital-intensive, but this is just one thread. Meanwhile, reindustrialization, renewed defense investment, power grid reconstruction, and the reshoring of supply chains under deglobalization pressures are 叠加 ed with financing needs from sovereign states covering rapidly rising interest expenses and expanding welfare costs. With multiple demand curves shifting upward simultaneously, the price of capital is naturally being pushed higher.

Wilson's conclusion is that this capital competition is "likely to be a persistent medium-term feature, driving capital pricing and costs consistently higher, thereby changing the investment paradigm relative to recent history."

The Fed Is a Passenger, Not the Driver

This week, the US 30-Year Treasury Yield decisively broke through, rising to levels unseen since before the Global Financial Crisis (pre-GFC).

The context for this breakout is the new Federal Reserve Chair Walsh's deliberate reduction in forward guidance, which has significantly increased uncertainty about the policy path. Citing historical data, Wilson noted: "Looking back at the six Fed Chairs since 1970, Bernanke and Yellen each experienced a 10% drawdown in their first year, while the other four faced drawdowns of 20% to 36% in their first year." Historically, markets have struggled during the initial period of a new Chair's tenure.

However, Wilson made his stance clear: "I agree that the Fed is more of a passenger than a driver in this discussion."

In other words, the fundamental driver of rising yields is not monetary policy, but the aforementioned structural capital demand. "Given the capital competition described at the outset, do not expect this breakout to reverse quickly."

Calm Indices, Turbulent Undercurrents

For investors focused solely on index movements, July appeared calm. However, Wilson pointed out that "beneath the indices, the trends are historic."

Two main themes played out simultaneously:

First, high dispersion among individual stocks. Looking at last Friday alone: Amazon rose 15% in a single day, while Apple fell 10%. Such divergence on the same day for the two largest companies by global market cap is extremely rare.

Second, the collapse of momentum factors. This market-neutral portfolio saw a 40% decline, surpassing the extreme factor rotation records of the March 2000 tech bubble burst, causing "significant difficulties in effective risk management for many."

The result was massive de-risking. Goldman Sachs Prime data shows that total exposure for fundamental managers dropped to a one-year low, with net long positions falling to the bottom quartile. Wilson believes that after this cleansing, the market structure is "much cleaner."

August: Why It Is Not Time to Bottom-Fish Easily

With de-risking complete, does it mean it is time to switch to long positions? Wilson provided several reasons why July's price performance will not simply reverse:

• The impact of the yield breakout has not yet been fully digested by the market, and related recalibration is still ongoing;

• The extreme volatility in July (KOSPI up 18% in a single day, SK Hynix up 26% in a single day) has changed the input parameters of risk models, preventing many institutions from quickly rebuilding positions;

• Looking ahead 3 to 6 months, the outlook is not simple—the focus after summer will shift to the US midterm elections. Wilson cited data: In the 13 midterm election years since 1974, the median return of the S&P 500 from early August to Election Day was 0%.

August is likely to be a digestion period.

Fundamentals: Strong Earnings, But Internal Divergence

Despite severe market volatility, the fundamental picture is surprisingly robust.

Wilson pointed out that, unlike typical years, EPS expectations for 2026 and 2027 were continuously revised upward throughout the year. Q2 results were generally impressive, but the second derivative began to diverge: US single-quarter EPS growth is expected to peak this quarter at around 26%; whereas European EPS growth was 13% in the first half, expected to accelerate to 19% in the second half, forming a rare strong second-half pattern.

The memory chip sector is an exception. Although it is one of the best-performing sectors year-to-date, marginal news has shown signs of deterioration: spot DRAM prices are stabilizing, and technological progress in low-memory-consumption models is accelerating. More critically—after completing its IPO, Chinese memory chip company CXMT saw its stock price rise sixfold above the issue price, with its market cap exceeding $550 billion, signaling a significant expansion in future supply.

Hyperscale Cloud Companies: "Staggering" CapEx, But Equally Stunning Returns

The most important verification proposition of this earnings season is whether hyperscale cloud companies can provide strong enough revenue growth and ROI signals while increasing capital expenditure.

The answer is yes—at least for Amazon and Microsoft.

Goldman Sachs' current capital expenditure forecasts for Alphabet, Amazon, and Microsoft are as follows:

• Alphabet: $350 billion in 2027, $415 billion in 2028

• Amazon: $325 billion in 2027, $366 billion in 2028

• Microsoft: $262 billion in 2027, $284 billion in 2028

Wilson stated bluntly that this scale is "staggering."

But at the same time, business performance is equally shocking: Google Cloud growth accelerated to 82% year-over-year; Microsoft confidently described enterprise customers migrating from "frontier models" to "frontier ecosystems" (infrastructure that routes requests between the most suitable model capabilities); and AWS revenue growth accelerated to its highest level since the pandemic.

Most impactful was the direct statement from Amazon's management during the earnings call:

"AI revenue on an annualized basis has climbed significantly quarter-over-quarter, currently exceeding $25 billion, with triple-digit year-over-year growth."

"We see margins and returns in our AI business slightly ahead of the trajectory we had when we initially built our cloud business."

"Although capital expenditure reaches $220 billion in 2026, we still will not have enough capacity to meet all demand in 2026, and likely the same in 2027, while the demand scale in 2028 is already staggering... We have long believed AWS could become a hundred-billion-dollar revenue business; now we believe it will be at least twice that number, likely becoming a $1 trillion annual revenue business, accompanied by highly attractive free cash flow and return on invested capital."

Private Sector vs. State Sector: A Contradictory Transition Period

Wilson concluded with a macro framework: the current period is a transition.

Hyperscale companies in the private sector are competing to invest, speeding towards an AI-enabled future; while the state sector is increasingly constrained by capital, making the contradiction between the two increasingly prominent.

"Global economic reality will, at some point, force people to face the political choices inevitably brought by capital repricing—but that is a discussion for another day."

For now, the AI supercycle is still ahead, and August is likely to be a relatively calm digestion window.