Goldman Sachs Takes a Bold Stance: This is the Largest Capital Demand Cycle in Human History, and the Fed is Just a Spectator

Author: Long Yue, Wall Street Insights

As AI, re-industrialization, defense restructuring, and sovereign debt simultaneously vie for capital, Goldman Sachs believes this capital competition will rewrite investment paradigms—while the Federal Reserve is merely a spectator in this grand play.

For decades, the backdrop of the global economy has been characterized by "excess savings"—abundant capital and low interest rates, with money struggling to find a place to go.

This era is coming to an end.

Mark Wilson, head of Goldman Sachs' European hedge fund business, stated in his latest weekly report: "We are in the most capital-hungry investment cycle in history."

The driving forces are not singular. The construction of AI infrastructure itself has consumed vast amounts of capital, but this is just one line of demand. Meanwhile, re-industrialization, reinvestment in defense, reconstruction of power systems, and the reconfiguration of supply chains under de-globalization pressures, combined with the financing needs of sovereign nations to cover rapidly rising interest expenses and expanding welfare expenditures—multiple demand curves are pushing upwards, naturally raising the price of capital.

Wilson concludes that this capital competition "is likely to be a persistent mid-term feature that will drive capital pricing and costs higher, thereby changing the investment paradigm relative to modern history."

The Fed is a Passenger, Not the Driver

This week, the yield on the 30-year U.S. Treasury decisively broke through, reaching levels unseen since before the financial crisis (pre-GFC).

The backdrop of this breakthrough is the new Fed Chair, Waller, intentionally reducing forward guidance, leading to a significant increase in market uncertainty regarding policy paths. Wilson cites historical data: "Looking back at the six Fed chairs since 1970, Bernanke and Yellen each experienced a 10% pullback in their first year, while the other four faced pullbacks of 20% to 36%." Markets have historically struggled during the early tenure of new chairs.

However, 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 aforementioned structural capital demand. "Given the capital competition described at the outset, do not expect this breakthrough to reverse quickly."

Calm Indices, Turbulent Undercurrents

For investors focused solely on index fluctuations, July may seem calm. But Wilson points out, "Beneath the indices, the movements are historic."

Two main narratives are unfolding simultaneously:

First, individual stocks are highly dispersed. Just last Friday: Amazon surged 15% in a single day, while Apple dropped 10%—this kind of divergence among the two largest companies by market capitalization on the same day is extremely rare.

Second, momentum factors have collapsed. The market-neutral portfolio has seen a 40% decline, surpassing the extreme factor rotation record during the tech bubble burst in March 2000, "causing significant difficulties for effective risk management for many."

The result is large-scale de-risking. Goldman Sachs Prime data shows that fundamental managers' total exposure has dropped to a one-year low, with net longs falling to the bottom quartile. Wilson believes that after this cleansing, the market structure is now "much cleaner."

August: Why Not to Rush into Buying the Dip

With de-risking complete, does this mean it’s time to go long? Wilson provides several reasons why the price performance in July is unlikely to reverse:

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

• The extreme volatility in July (the South Korean Composite Index surged 18% in one day, and SK Hynix jumped 26% in a single day) has altered the input parameters of risk models, making it difficult for many institutions to quickly re-enter positions;

• Looking ahead 3 to 6 months, the outlook is not straightforward—the focus will shift to the U.S. midterm elections after summer. Wilson cites data: since 1974, in 13 midterm election years, the median return of the S&P 500 from early August to election day has been 0%.

August is likely to be a digestion period.

Fundamentals: Strong Earnings, but Internal Disparities

Despite the market's volatility, the fundamental picture is surprisingly robust.

Wilson notes that, unlike typical years, EPS expectations for 2026 and 2027 have been continuously revised upward throughout the year. Second-quarter earnings were overall impressive, but second derivatives are beginning to diverge: U.S. quarterly EPS growth is expected to peak this quarter at around 26%; while Europe’s EPS growth for the first half was 13%, with the second half expected to accelerate to 19%, creating a rare strong pattern in the latter half of the year.

The storage chip sector is an exception. Despite being one of the best-performing sectors year-to-date, marginal news has shown signs of deterioration: spot DRAM prices have stabilized, low memory consumption model technological advancements have accelerated, and crucially—Chinese storage chip company CXMT's stock price has risen sixfold since its IPO, with a market capitalization exceeding $550 billion, indicating a significant future supply expansion.

Hyperscale Cloud Companies: Capital Expenditures "Stunning," but Returns Equally Impressive

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

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

Goldman Sachs currently forecasts capital expenditures 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 states that this scale is "stunning."

At the same time, business performance is equally impressive: Google Cloud's growth accelerated to 82% year-on-year; Microsoft confidently describes that enterprise customers are migrating from "frontier models" to "frontier ecosystems" (infrastructure that routes requests between the most suitable model capabilities); AWS revenue growth has accelerated to its highest level since the pandemic.

The most striking statement came from Amazon's management during the earnings call:

"AI revenue is growing significantly on an annualized basis, now exceeding $25 billion, with a year-on-year growth rate in triple digits."

"We see that the profit margins and returns from AI business are slightly ahead of the trajectory we established when we built our cloud business."

"Despite capital expenditures reaching $220 billion in 2026, we still won’t have enough capacity to meet all demand in 2026, and likely not in 2027 either, while the demand scale for 2028 is already astonishing... We have long believed that AWS could become a multi-hundred billion dollar revenue business, and now we believe it will be at least double that figure, likely becoming a trillion-dollar annual revenue business, accompanied by highly attractive free cash flow and investment capital returns."

Private Sector vs. Public Sector: A Contradictory Transition Period

Wilson concludes with a macro framework: we are currently in a transition period.

The private sector's hyperscale enterprises are racing to invest, charging full speed towards an AI-enabled future; while the public sector is increasingly constrained by capital, and the contradiction between the two will become more pronounced.

"The realities of the global economy will, at some point, force people to confront the political choices inevitably brought about by capital repricing—but that is a discussion for another day."

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

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