Goldman Sachs Says Capital Spending Is Powering the Bull Market

Peter

Equities have done well because earnings have been broadly very strong across all main regions. Earnings are a function of nominal GDP (real GDP plus inflation), which remains reasonably healthy.

This is the fundamental driver for the first half and will continue to drive equities in the second half.

Peter

The massive increase in CapEx around AI commercialization is driving earnings growth not just in chip and memory stocks, but also spilling into infrastructure companies supporting the buildout.

This CapEx cycle is a key structural theme supporting broader market gains.

Peter

Earnings will likely be weaker in H2 but still pretty healthy. Equities will make reasonable gains and be relatively broad-based.

How long does the effect of capital expenditure filtering through wider parts of the market last? Are we at the peak?

Stephen

Peter

At some point there will be a slowdown in demand for compute, but we are still some way away from that. We are in the early stages of a multi-year increase in infrastructure and CapEx spending from other factors as well.

Governments are borrowing more for infrastructure, supply chain resilience, energy capacity, and defense spending. This is the first sustained increase in investment spending across major economies in a generation.

Another theme has been the influence of retail investors. Does that change how you put your outlooks together?

Stephen

Peter

The massive increase in retail investors has mainly been in the US and parts of Asia. It reflects a vulnerability if people get too overexcited about narratives like AI, with increased margin borrowing and leveraged ETFs.

However, retail investors have been consistently buying and doing well. Private sector and household balance sheets are relatively healthy with strong wealth gains. If it becomes more speculative, it leads to correction vulnerabilities, but the underlying trend is still positive.

Do the gains in KOSPI continue? Is it still a good time to get in?

Stephen

Peter

KOSPI was up almost 100% in the first half and nearly 80% last year. The index is heavily dominated by two chip/memory companies making up 60% of the index, benefiting from CapEx spending. Earnings are expected to grow 320% this year.

However, the chip sector is cyclical. At some point there will be a slowdown in demand and prices will adjust. We wouldn't expect the same gains in H2, but we have a positive view on the broad market.

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