What shift in styles does this decline reveal?

  • In the week ending 23 October, global equities fell about 1%. The pullback of previously strong stocks relative to the market continued, and AI-related stocks lagged non-AI stocks. Defensive stocks and asset-light companies outperformed cyclical stocks and capital expenditure beneficiaries, putting hedge funds under greater pressure as well.
  • Goldman Sachs’ risk appetite indicator fell sharply to -0.5, its lowest since “Liberation Day.” More notable than the decline in the index is the change in market leadership: capital-intensive themes lost their relative advantage, while asset-light and defensive styles performed better.

Why is borrowing becoming more expensive, and which financing changes merit attention?

  • Goldman Sachs attributes rising interest rates to intensifying competition for capital and renewed inflationary pressure. Since September 2026, yields on euro-denominated investment-grade and high-yield bonds have risen by about 30 and 90 basis points, respectively; borrowing costs have risen more for high-yield bonds with weaker credit quality.
  • Meanwhile, Goldman Sachs expects AI-related debt issuance in 2027 to double from 2026. Besides creating demand for equipment and construction, AI expansion also increases financing needs, making it a factor to watch amid intensifying competition for capital.

How does the interest burden feed through to profits, investment and shareholder returns?

  • In its analysis of European corporate borrowing costs, Goldman Sachs notes that interest expenses as a share of sales revenue have risen from 1.25% to 1.85% since 2022. The additional 0.6 percentage points directly drag on margins, with a corresponding impact on profits of more than 5%: even if revenue is unchanged, more of it must go toward interest payments.
  • The pressure will continue to feed through as companies refinance at higher yields. Goldman Sachs observes that management teams are placing greater emphasis on reducing leverage; if more funds are used to repay debt, fewer resources may be available for new investment or shareholder returns. Borrowing costs therefore affect both current earnings and how capital is allocated.

Why does Goldman Sachs favor quality companies without expecting a systemic credit event?

  • Goldman Sachs believes overall leverage in Europe remains manageable and does not expect a systemic credit event. Its assessment focuses on differences among companies, rather than all businesses falling into financing difficulties at the same time.
  • Refinancing needs, floating-rate debt and slowing earnings momentum will leave companies with weaker balance sheets more exposed to pressure from high interest rates. Given these constraints, Goldman Sachs believes the quality style could benefit: companies’ ability to withstand rising borrowing costs is becoming an important basis for style selection.