Goldman Sachs second-half macro roadmap: Competition for capital will determine market direction

Goldman Sachs' macro trader's latest release of the second-half roadmap indicates that the market's mainstream narrative on AI is shifting from a "software cycle" to a "capital expenditure cycle," a transformation that will profoundly reshape the interest rate landscape.

According to a joint report by Goldman Sachs macro traders Cosimo Codacci-Pisanelli and Rikin Shah, AI infrastructure construction is physically more akin to building railroads than the software expansion of the internet bubble era. This means that large-scale capital expenditures require sustained financing, with the private and public sectors competing for increasingly scarce funds, thereby materially capping the upside for the belly and long end of developed market curves.

Meanwhile, the softening of the U.S. June nonfarm payrolls data has cooled expectations for a July rate hike, but Goldman Sachs believes a rate hike remains "an option, not a necessity," with inflation data being the ultimate decider.

This roadmap has direct implications for bond investors: Goldman Sachs recommends selling into strength at the long end of the curve rather than chasing rallies, citing that fiscal supply pressure now has "a second leg" from private sector capital expenditure financing needs, with both competing for the same shrinking pool of duration buyers.

The AI Narrative Framework Flips: From a Software Cycle to Railroad-Style Capex

The core argument of the Goldman Sachs report is that the market has long characterized AI as a software cycle, using this to support optimistic expectations for interest rate trends—believing that AI will ultimately bring about lower inflation, reduced computing costs, improved corporate margins, and even a lower neutral rate. Goldman Sachs suggests that this "destination" judgment may not be far off, but it severely underestimates the costs of the "journey" itself.

The report notes that the software cycle depresses equilibrium interest rates because its expansion requires little capital; in contrast, an infrastructure construction boom does the opposite, pushing rates higher by competing for scarce capital. Currently, capital expenditure forecasts for hyperscale data centers are continuously being revised upward, and financing pressures have clearly spilled over from private balance sheets—credit issuance is massive and still expanding, while equity financing channels have also been activated simultaneously.

The report also warns that if such levels of capital spending materialize, physical bottlenecks—such as electricity, power grids, skilled construction labor, and cooling systems—could pose potential headwinds to inflation normalization. Goldman Sachs believes the burden of proof now rests with the market bulls as to whether productivity gains can be realized and how long that will take.

Equity Market Rotation Has Already Sent a Signal: The Return on Invested Capital Question Surfaces

Goldman Sachs views the structural rotation in equity markets as the clearest signal. The report points out that the rotation of capital from AI capex "spenders" to AI capex "beneficiaries" indicates that the stock market has begun to price in the "return on invested capital" question, rather than just chasing narratives.

The report admits that this question is currently unresolved, and therefore recommends placing more weight on known certainties—namely, the reality of intensified capital competition. Goldman Sachs' conclusion is that AI may still eventually deliver the lower inflation and lower neutral rates implied by the software cycle, but before reaching that destination, a massive amount of physical construction needs to be financed, and that financing must come from somewhere.

This logic directly points to the interest rate market: the upside for the belly and long end of developed market curves is capped, and fiscal supply pressure now has a "companion" in the private sector, both competing for the same shrinking pool of duration buyers. Goldman Sachs' operational recommendation: sell into strength at the long end of the curve.

July Rate Hike Expectations Cool: Soft NFP Buys Time for the Fed

Regarding the Fed's policy path, Goldman Sachs believes the June nonfarm payrolls report has "let the air out" of expectations for a July rate hike. The report shows that the three-month average of nonfarm payroll gains dropped from 188k to 111k, and the unemployment rate edged down, but alongside a decline in the labor force participation rate, making the actual significance limited. Additionally, the hospitality sector saw negative job growth in June, and revised data indicates that healthcare services are almost the only true source of job creation.

Goldman Sachs notes that the overall employment data is soft, consistent with other labor market indicators—weak job openings, a declining labor market differential index, sluggish hiring intentions, and no rebound in key wage growth.

Regarding Fed officials' statements, Fed Chairman Warsh struck a cautious tone at the Sintra conference, with his style compared by Goldman Sachs to "the communication style of the Greenspan era." Goldman Sachs views his overall stance as slightly dovish—Warsh described inflation risks as having declined, and his comments on AI focused on long-term supply-side effects, rather than the capital cost issue highlighted by Goldman Sachs.

Goldman Sachs maintains its baseline judgment: the Fed can raise rates, but it is an option. Energy price trends are moving in the right direction, and the methodology adjustment to PCE will also help lower sequential inflation readings. The deeper question is whether rate hikes are the right tool for a capex-driven cycle in the first place—the rate-sensitive areas that rate hikes can truly reach (such as the housing market) are already under significant strain. Goldman Sachs expects that even if the Fed initiates rate hikes, there is no reason for a sustained tightening cycle, with no more than 2-3 rate increases.

Core Theme for 2H: Micro Drives Macro Again

In its summary, Goldman Sachs points out that market focus is returning to AI and capital costs, with the micro level once again driving macro trends, but the narrative framework is starkly different from the start of the year. The destination may still be the picture painted by the software cycle—lower inflation, improved margins, a lower neutral rate—but the current path is a capital expenditure cycle with the physical scale of railroads, and it must be financed.

The competition for capital between private and public sectors, and between credit and equity, is the core narrative for the second half of the year, and the fundamental reason why the belly and long end of developed market curves have limited upside. On the short end of the U.S. curve, the nonfarm data has weakened the momentum for a July rate hike. A rate hike remains an option; inflation data will determine the September direction, and whether rate hikes are suitable for a capex-driven cycle remains an open question.

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