As artificial intelligence, reindustrialization, defense restructuring, and sovereign debt simultaneously compete for capital, Goldman Sachs argues this capital battle will rewrite investment paradigms—while the Federal Reserve remains a mere bystander in this grand drama.
For decades, the global economy's backdrop was one of "excess savings"—abundant capital, low interest rates, and money with nowhere to go. That era is coming to an end.
Mark Wilson, head of Goldman Sachs' European hedge fund business, stated bluntly in his latest weekly report: "We are in the most capital-hungry investment cycle in history."
The driving forces are not singular. AI infrastructure construction alone is extremely capital-intensive, but that is just one thread. Concurrently, reindustrialization, defense reinvestment, power grid reconstruction, supply chain realignment under deglobalization pressures, and sovereign financing needs to cover rapidly rising interest expenses and expanding welfare costs—multiple demand curves are simultaneously shifting upward, naturally pushing up the price of capital.
Wilson's conclusion is that this capital competition "is likely to be a persistent medium-term feature, driving capital pricing and costs higher, thereby altering the investment paradigm compared to recent history."
The Fed is a Passenger, Not a Driver
This week, the U.S. 30-year Treasury yield decisively broke through, reaching levels not seen since before the 2008 Global Financial Crisis (pre-GFC).
The backdrop of this breakout is the new Fed Chair's deliberate reduction in forward guidance, significantly increasing market uncertainty about the policy path. Wilson cites historical data: "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." Markets have historically been challenging during new chairs' early tenures.
But Wilson clearly states: "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 structural capital demand described above. "Given the capital competition outlined at the outset, do not expect this breakout to reverse quickly."
Index Calm, But Undercurrents Are Turbulent
For investors focused solely on index movements, July appeared calm. However, Wilson points out, "beneath the index, the moves are historic."
Two main themes are unfolding simultaneously:
First, extreme stock dispersion. Just last Friday: Amazon surged 15% in a single day, while Apple fell 10%—these are the world's two largest companies by market cap, and such divergent moves on the same day are exceptionally rare.
Second, the momentum factor collapsed. This market-neutral portfolio experienced a 40% decline, surpassing the extreme factor rotation record during the March 2000 tech bubble burst, "creating tremendous difficulty for effective risk management for many."
The result is massive de-risking. Goldman Sachs Prime data shows fundamental managers' gross exposure fell to a one-year low, and net long exposure dropped to the bottom quartile. Wilson believes that after this purge, the market structure is "much cleaner."
August: Why It's Not Easy to Bottom Fish
Does the completion of de-risking mean it's time to go long? Wilson provides several reasons why July's price performance won't simply reverse:
The impact of the interest rate breakout has not yet been fully absorbed by the market, and related recalibration is still ongoing.
July's extreme volatility (e.g., the KOSPI index surging 18% in one day, SK Hynix leaping 26%) has changed the input parameters of risk models, leaving many institutions unable to quickly re-leverage.
Looking ahead 3 to 6 months, the outlook is not straightforward—post-summer, the focus will shift to the U.S. midterm elections. Wilson cites data: since 1974, across 13 midterm election years, the median return of the S&P 500 from early August to election day is 0%.
August is likely to be a digestion period.
Fundamentals: Strong Earnings, But Internal Divergence
Despite market turbulence, the fundamental picture is surprisingly robust.
Wilson notes that, unlike typical years, EPS expectations for 2026 and 2027 have been consistently revised upward throughout the year. Second-quarter results were strong overall, but the second derivative is showing divergence: U.S. single-quarter EPS growth is expected to peak this quarter at around 26%, while European first-half EPS growth is 13%, with the second half potentially accelerating to 19%, forming a rare pattern of stronger performance in the latter half of the year.
The memory chip sector is an exception. Despite being one of the year's best-performing sectors, marginal news flow has turned negative: spot DRAM prices have stabilized, technology for low-memory model inference is accelerating, and more critically—Chinese memory chip company CXMT completed its IPO, with its stock price surging 6x above the offering price, reaching a market cap of over $550 billion, signaling a significant expansion in future supply.
Hyperscale Cloud Companies: Capital Expenditure is 'Staggering,' but Returns Are Equally Impressive
This earnings season's most critical validation point was whether hyperscale cloud companies could simultaneously raise capital expenditure and deliver strong revenue growth and ROI signals.
The answer is yes—at least for Amazon and Microsoft.
Goldman Sachs currently forecasts capital expenditure for Alphabet, Amazon, and Microsoft 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 calls this scale "staggering."
But simultaneously, business performance is equally stunning: Google Cloud's growth accelerated to 82% year-over-year; Microsoft confidently describes enterprise customers migrating from "frontier models" to "frontier ecosystems" (infrastructure that routes requests between the most suitable model capabilities); AWS revenue growth accelerated to its highest level since the COVID-19 pandemic began.
The most impactful statement came from Amazon's management during the earnings call:
"AI revenue on an annualized run rate has climbed significantly sequentially, now exceeding $25 billion, with triple-digit year-over-year growth."
"We see the profit margins and returns on our AI business slightly ahead of the trajectory we had when we initially built the cloud business."
"Despite $220 billion in capital expenditure in 2026, we still won't have enough capacity to meet all demand in 2026, likely the same in 2027, and the demand scale for 2028 is already astonishing... We have long believed AWS can be a hundreds-of-billions-dollar revenue business, and now we believe it will be at least twice that, likely becoming a $1 trillion revenue business, with highly attractive free cash flow and returns on invested capital."
The Private Sector and the State: A Contradictory Transition Period
Wilson concludes with a macro framework: the current situation is a transition period.
The private sector's hyperscale companies are racing to invest, charging full speed toward an AI-enabled future; meanwhile, the state sector is increasingly capital-constrained, and the contradiction between these two forces will become more pronounced.
"Global economic reality, at some point, will force people to confront the political choices that inevitably arise from the repricing of capital—but that's a discussion for another day."
For now, the AI super-cycle remains ahead, and August is likely to be a relatively calm digestion window.
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