Goldman Sachs’ macro roadmap for the second half of the year: the competition for capital will determine market trends

The latest roadmap released by Goldman Sachs macro traders indicates that the mainstream market narrative around artificial intelligence is shifting from a "software cycle" to a "capital expenditure cycle." This change will profoundly reshape the landscape of the rates market.

According to a report jointly authored by Goldman Sachs macro traders Cosimo Codacci-Pisanelli and Rikin Shah, the physical scale of AI infrastructure construction is more akin to railway construction than to the software expansion seen during the internet bubble era. This implies that large-scale capital expenditures will require sustained financing, with both the private and public sectors competing for increasingly scarce capital, which will substantially suppress the rebound potential of the mid and long sections of curves in developed markets.

Meanwhile, softer U.S. nonfarm payroll data in June has cooled expectations for a July rate hike, but Goldman Sachs believes a hike remains "optional, not mandatory," with inflation data the decisive factor.

This roadmap has direct implications for bond investors: Goldman suggests shorting at curve rallies on the far end, rather than chasing rebounds. The rationale is that fiscal supply pressure is now supported by a "second leg" from private sector capital expenditure financing demand, with both sides vying for a shrinking batch of duration buyers.

AI Narrative Framework Reversal: From Software Cycle to Railway-Scale Capital Expenditure

The core argument of the Goldman Sachs report is that the market has long characterized AI as a software cycle, underpinning optimistic expectations for rate movements—believing AI will ultimately drive inflation down, reduce computing costs, improve corporate profit margins, and lower the neutral rate. Goldman Sachs notes that while this "destination" judgment may essentially be correct, the "journey" costs have been seriously underestimated.

The report points out that the software cycle lowered equilibrium rates because its expansion required little capital. In contrast, the surge in infrastructure construction pushes up rates by competing for scarce capital. Current forecasts for large-scale data center capital expenditures are continually revised upward, with financing pressures now clearly spilling over from private balance sheets—credit issuance is huge and expanding, while equity financing channels have also opened.

The report also warns that if these capital expenditures are realized, physical bottlenecks like electricity, power grids, skilled construction workers, and cooling systems could become potential obstacles to inflation normalization. Goldman Sachs argues that the burden of proof for "whether productivity gains can be realized and how long it takes" now sits with the bulls in the market.

Stock Market Rotation Signals: Capital Return Issues Surface

Goldman Sachs sees structural rotation in the equity market as the clearest market signal. The report notes a rotation of investment from the "spending side" of AI capital expenditure to the "beneficiary side," indicating that the equity market has started pricing in the issue of "return on invested capital," rather than merely chasing narratives.

The report admits that this issue remains unresolved, so it recommends focusing more on known certainties—namely, the intensifying competition for capital. Goldman’s conclusion is: AI may eventually achieve the deflation and lower neutral rates implied by the software cycle, but before reaching that endpoint, substantial real-world construction requires financing, and that funding must come from somewhere.

This logic directly impacts the rates market: the rebound space for mid and long ends of developed market curves is constrained, with fiscal supply pressure now having a "companion" from the private sector, both vying for a shrinking demand for duration buyers. Goldman Sachs’ trading suggestion: short any rallies at the far end of the curve.

July Rate Hike Expectations Cool: Soft Nonfarm Data Buys Fed Time

On the Federal Reserve policy path, Goldman Sachs believes the June nonfarm payroll report "deflated" expectations for a July rate hike. The report shows the three-month average of new nonfarm jobs fell from 188,000 to 111,000, unemployment edged lower but the labor participation rate also slipped, making the significance limited. In addition, June saw negative job growth in the hospitality sector, and the revised data shows healthcare was nearly the only real source of job creation.

Goldman Sachs notes the overall employment data is soft and increasingly in line with other labor market indicators—weak job openings, declining labor market dispersion metrics, subdued hiring intentions, and no rebound in key wage growth.

Regarding Fed officials' remarks, Fed Chair Warsh was cautious at the Sintra meeting, with Goldman Sachs comparing his approach to "the Greenspan era's communication style." Goldman finds his overall stance somewhat dovish—Warsh described inflation risks as having eased, and his AI comments focused on long-term supply-side effects, rather than the capital cost concerns emphasized by Goldman.

Goldman Sachs maintains its baseline view: the Fed can raise rates, but it's optional. The direction of energy prices is positive, and adjustments to the PCE methodology help lower sequential inflation readings. The deeper issue is whether rate hikes are indeed the right tool for a capital expenditure-driven cycle—rate-sensitive sectors (such as housing) are already clearly under pressure. Goldman Sachs expects that even if the Fed initiates hikes, there is no reason for a sustained hiking cycle; hikes are unlikely to exceed two or three times.

Second-Half Core Theme: Micro Again Drives Macro

In conclusion, Goldman Sachs notes the market focus is returning to AI and capital costs, with micro once again driving macro trends, though the narrative framework is now fundamentally different from early in the year. The "destination" might still be that envisioned by the software cycle—lower inflation, improved profit margins, lower neutral rates—but the present journey is a capital expenditure cycle with railway-scale physical magnitude that must be supported by financing.

Capital competition between private and public sectors, credit and equity, is the core narrative for the second half of the year and the fundamental reason for the limited rebound in mid and long sections of developed market curves. On the U.S. short end, nonfarm data has already weakened momentum for a July hike, a rate hike is still optional, inflation data will determine the direction in September, and whether rate hikes suit a capital expenditure-driven cycle itself remains unresolved.

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