The wave of artificial intelligence investment is driving a dramatic increase in capital needs, leading US companies to issue more shares to investors. According to Goldman Sachs, US corporations raised $2.52 trillion in the second quarter through initial public offerings, follow-on offerings, convertible securities, and SPACs, surpassing the previous quarterly record of $2.34 trillion set in the first quarter of 2021. Within this total, second-quarter follow-on offerings reached $700 billion, and cumulative follow-on issuance for the year through July hit $1.05 trillion, the highest level for the same period since 2021.
However, Goldman Sachs strategist Ben Snider noted that the increase in equity supply is more a return to normal levels than a threatening issuance boom. Despite the large dollar amounts, Snider pointed out that relative to the overall size of the stock market, current share issuance remains below its historical average. Additionally, this year's activity has been highly concentrated, with the top three IPOs and follow-on offerings accounting for nearly half of total issuance through July.
Artificial intelligence has become a key driver of new share issuance. In a report released on August 7, Goldman Sachs stated that AI-related companies accounted for about 40% of US follow-on equity issuance this year. Technology, media, and telecommunications firms made up 28% of follow-on offerings, a significant jump from the 13% average over the past five years. As major tech companies continue to build data centers and other AI infrastructure, this financing demand is likely to increase substantially. Consensus estimates suggest that capital expenditures by hyperscale cloud providers could surpass $1 trillion per year in the coming years. Goldman Sachs identified Amazon (AMZN.US), Google (GOOGL.US), Meta Platforms (META.US), Microsoft (MSFT.US), and Oracle (ORCL.US) as key hyperscale players, projecting that their capital spending will exceed operating cash flow by about $150 billion by 2027. Some investors believe the actual funding gap could be even larger. Goldman Sachs estimates that if hyperscale companies' capital expenditure next year reaches the $1.4 trillion anticipated by some investors, the financing shortfall could exceed $300 billion, even with accelerated cash flow growth. However, the bank noted that recent earnings reports from Amazon, Google, Meta, and Microsoft still show upside potential in revenue and operating cash flow, and higher returns from AI investments could help these companies fund more capital spending internally.
Debt financing is expected to bear the primary burden of the funding needs. Goldman Sachs credit strategists anticipate that hyperscale cloud providers will use debt to cover 35% of their capital expenditures by 2027. This could drive global bond issuance to around $400 billion next year, with similar levels expected in subsequent years. The bank also forecasts about $300 billion in project finance demand for data centers and chips by 2027. Equity financing will still play a role, particularly for other AI infrastructure companies, as issuing shares can help fund multi-year investment projects without overburdening balance sheets. The pace of equity issuance will also depend on market conditions, with historical data showing that companies are more willing to issue stock when the overall market is performing well and stock valuations are high.
Investors have so far absorbed the new supply of shares. New share issuance typically puts short-term pressure on stock prices. Over the past 30 years, companies conducting follow-on offerings have seen their stock prices fall by a median of about 2% on the first trading day after the announcement, though prices usually recover over the following months. Goldman Sachs found no clear evidence that investors are struggling to absorb this year's new supply. Recent follow-on offerings have been priced at an average discount of about 7% to the pre-announcement price, and the post-issuance performance of these stocks has generally followed historical patterns.
Goldman Sachs projects that US corporate equity issuance will set a dollar-value record in 2026. The bank forecasts total share supply next year of around $700 billion, with slightly more than $225 billion coming from IPOs and about $450 billion from other forms of equity issuance. However, this amount represents only about 1% of the total market capitalization of the Russell 3000 index, roughly in line with the average annual level from 2015 to 2019. This ratio is an important consideration for investors concerned about whether the corporate financing wave could exceed the stock market's capacity to absorb demand.
Snider stated that corporate stock buybacks are expected to far exceed new share issuance, providing strong support for the market. In the second quarter, share repurchases by S&P 500 index companies grew at an 11% year-over-year rate. As of the time of Goldman Sachs' report, total US corporate share repurchase authorizations had reached a record $989 billion. The bank expects US-listed companies to buy back $1.4 trillion worth of shares this year, a figure that will surpass direct equity issuance and any additional supply from the expiration of IPO lock-up periods. The resulting market picture is that AI investment is creating growing external financing needs, but it has not yet led to an oversupply of shares that overwhelms investor demand. As Goldman Sachs summarized in its report title, equity issuance is a "headwind, but not a hurricane."
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