Goldman Sachs strategists are dismissing fears of an "earnings bubble" in the US, attributing the strong corporate profits to a resilient economic outlook and the burgeoning artificial intelligence sector. They point to significant earnings growth, with S&P 500 firms experiencing roughly 30% profit jumps in each of the first two quarters of the year, which are among the best performances seen.
However, there are differing views within Goldman Sachs regarding the AI boom's sustainability and its impact on the cost of capital. Peter Oppenheimer, Goldman's chief global equity strategist, has highlighted that while technology stocks might not have a valuation problem, they could face an "earnings problem." He notes that AI infrastructure spending and government borrowing are competing for capital, driving up the global cost of capital. This competition is evidenced by a 65% year-over-year growth in capital spending among AA-rated technology issuers in Q2 and $135 billion in US convertible bond issuance year-to-date, with AI-related borrowers accounting for 44% of that volume.
The increased cost of capital, partly due to AI-related borrowing and government spending, has led to higher long-term interest rates. While strong nominal GDP and corporate profit growth have largely offset the negative impact of rising bond yields so far, Oppenheimer cautions that any slowdown in profit growth, combined with a higher cost of capital, could pressure equity prices. This dynamic was previewed by a significant drop in chipmakers' stocks after calls for a slowdown in AI development, while hyperscalers like Alphabet, Microsoft, and Meta saw their stocks rise, suggesting they could "harvest returns" if AI progress slows. Meanwhile, Goldman's credit team has raised its full-year US investment-grade issuance forecast by $200 billion to a record $2.3 trillion, with AI-related issuers making up a quarter of this supply.
