Goldman warns AI debt funds half of S&P 500 earnings growth

Half of S&P 500 earnings growth now rests on AI capital spending funded by debt, Goldman Sachs warns.

"AI capital expenditure currently drives about half of S&P 500 earnings-per-share growth, but given its scale and reliance on external financing, that pace is hard to sustain," Tony Pasquariello, head of global hedge fund client business at Goldman Sachs, said in a client note.

The bank's credit strategists estimate hyperscalers will cover about 35 percent of 2027 capital spending — roughly $400 billion of a projected $1.1 trillion — with new debt. U.S. companies have raised $105 billion through equity issuance this year, the most since 2021, with about 40 percent tied to AI. Alphabet is selling another $25 billion of bonds.

The financing loop — hyperscalers borrow to build data centers, which becomes revenue for chipmakers and builders, lifting index earnings and supporting valuations — is showing cracks. Non-dealer investors sold a record $21.6 billion of Nasdaq futures during the week to Aug. 4 even as the index jumped 7.1 percent, turning net short for the first time since May 2025.

The $1 trillion AI buildout leans on credit

Goldman's economists put global AI investment at $1.019 trillion in 2026, with the U.S. portion at $581 billion — above the roughly $800 billion figure commonly cited. Two independent verification methods produced totals of $1.002 trillion and $1.06 trillion. As a share of U.S. gross domestic product, AI capital spending is expected to rise from 1.8 percent this year to 2.8 percent by 2028, approaching the scale of residential investment at the mid-2000s peak.

The credit market is already repricing the risk. AI-related issuers' credit spreads have begun to underperform non-AI counterparts, according to Goldman's Chris Hussey, as bond investors reassess the cost of a multiyear capital-spending cycle. When credit investors demand higher compensation for the same companies equity investors are chasing, history suggests the latter is usually wrong.

Smart money exits as the labor market stalls

Goldman's positioning tracker, run by derivatives strategist Robert Quinn, shows non-dealer investors sold $21.6 billion of Nasdaq futures in the week to Aug. 4, with short-building accounting for 72 percent of the flow. Hedge funds sold $11.9 billion and asset managers $7.4 billion. The Nasdaq's non-dealer net position turned negative for the first time since May 2025.

The exit came as the macro backdrop softened. July nonfarm payrolls fell by 23,000 against an 80,000 consensus, with the prior two months revised down by a combined 103,000. The three-month average of new jobs has collapsed to about 20,000 from 111,000, and Goldman estimates the underlying pace of hiring at roughly 5,000 a month. The unemployment rate dipped to 4.09 percent only because 264,000 people left the labor force; average hourly earnings rose 0.05 percent on the month.

Hedge funds' gross leverage sits at the second percentile of the past year, near 201.6 percent — closer to cautious probing than conviction buying, according to Goldman's Sarah Cohen. The S&P 500 closed at 7,757.64 on Aug. 7, up 13.2 percent year to date, with the top 10 stocks accounting for more than 37 percent of market capitalization and customer margin debt at a record $1.5 trillion, up 49 percent year over year. Gold, meanwhile, has moved back above its 50-day moving average as investors rebuild positions, with Goldman's senior trader Tony King pegging current gold positioning at 3 versus a highly bullish 10 in January. King flagged renewed U.S.-Iran conflict as the main risk to that outlook, with any disruption to energy transport pushing oil back above $100 a barrel.

Goldman's official read is that equity issuance marks "a return to normal, not a boom," and that slower earnings growth is "a change in character, not direction." The question for investors is who holds the paper when the music stops — with the next test coming Aug. 26, when Nvidia reports earnings the same week as the Federal Reserve's Jackson Hole symposium.

This article is for informational purposes only and does not constitute investment advice.