Goldman Sachs makes it clear: This is the largest capital demand cycle in human history, and the Federal Reserve is just a spectator

Author: Long Yue, Wall Street Watch

As AI, re-industrialization, defense restructuring, and sovereign debt compete for capital simultaneously, Goldman Sachs believes this capital competition will rewrite the investment paradigm—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 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, bluntly 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 been extremely capital-intensive, 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 rising simultaneously, naturally pushing up the price of capital.

Wilson's conclusion is: 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 Federal Reserve is a Passenger, Not a Driver

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

The backdrop of this breakthrough is the new Federal Reserve Chairman Waller's deliberate reduction of forward guidance, significantly increasing market uncertainty regarding the policy path. Wilson cited historical data: "Looking back at the six Federal Reserve Chairmen 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 not fared well during the early tenure of new chairmen.

But Wilson made it clear: "I agree that the Federal Reserve is more of a passenger than a driver in this discussion."

In other words, the fundamental driving force behind rising yields is not monetary policy, but the aforementioned structural capital demand. "Given the capital competition described at the beginning, do not expect this breakthrough to reverse quickly."

Indices Calm, Undercurrents Roiling

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

Two main narratives are unfolding simultaneously:

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

Second, the momentum factor has collapsed. The market-neutral portfolio experienced a 40% decline, surpassing the extreme factor rotation record during the bursting of the tech bubble 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 long positions falling to the bottom quartile. Wilson believes that after this cleansing, the market structure is now "much cleaner."

August: Why Not to Bottom-Fish Easily

With de-risking completed, does it mean one can go long? Wilson provided several reasons why the price performance in July is unlikely to reverse:

• The impact of the yield breakthrough 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 rose 18% in a single day, and SK Hynix rose 26% in a single day) has changed the input parameters of risk models, making it difficult for many institutions to quickly reallocate;

• Looking ahead to 3 to 6 months, the outlook is not straightforward—focus will shift to the U.S. midterm elections after summer. Wilson cited 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 Divergence

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

Wilson noted 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 an expected acceleration to 19% in the second half, forming a rare strong pattern for the latter half of the year.

The memory 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 are stabilizing, low memory consumption model technological advancements are accelerating, and more critically—Chinese memory 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 Also Impressive

The most important verification proposition of this earnings season is whether hyperscale cloud companies can provide sufficiently 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 stated that this scale is "stunning."

At the same time, business performance is equally impressive: Google Cloud's growth accelerated to 82% year-over-year; Microsoft confidently described that enterprise customers are 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.

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

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

"We see that the profit margins and returns of the 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 2027 is likely to be the same, while the demand scale for 2028 is already shocking… 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 number, likely becoming a trillion-dollar annual revenue business, accompanied by highly attractive free cash flow and return on invested capital."

Private Sector vs. Public Sector: A Contradictory Transition Period

Wilson concluded 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 reality 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 is still ahead, and August is likely to be a relatively calm digestion window.