Despite the Federal Reserve signaling higher interest rates for longer, Goldman Sachs' global co-head of Fixed Income, Currency and Commodities, Anshul Sehgal, sees a silver lining for investors.
In Goldman Sachs' "The Markets" podcast, recorded Sept. 17 following the Fed's rate hike, Sehgal said AI infrastructure could offer opportunities even with rates remaining elevated.
He noted that the U.S. equity market is now more leveraged than a year ago. Higher interest income went to savers, who then lent that capital to hyperscalers, neoclouds and other sectors, increasing leverage across the domestic equity market.
"I think long-term borrowing costs being in check is a net positive for the equity complex here," he said.
Strategist Favors AI Over Bonds
Sehgal said that the AI infrastructure is much larger compared with the potential reward from buying long-term bonds. He added that he expects long-term Treasury yields to fall to around 4.25%, while observing a more asymmetric opportunity in AI infrastructure, where investments could rise "multiplicatively."
However, Sehgal differentiated AI infrastructure from the broader market, suggesting that tighter monetary policy could still impact equities outside the AI sector.
"To me, it's being long compute, being long Neoclouds, being long data centers," he said.
U.S. Debt Fears May Be Overstated
The strategist said concerns over long-term U.S. debt sustainability are overstated. While annual deficit spending suggests debt-to-GDP could rise 6%-7%, nominal GDP has also grown around 6% annually over the past four years, limiting the increase.
He noted debt-to-GDP worsened by only 1%-1.5% each year, making the long-term sustainability risk less credible. In the near term, he said sustainability rhetoric is driving a bandwagon effect.
Experts Split On AI Investment Outlook
Sehgal's optimism about AI infrastructure investments comes amid concerns raised by other market strategists. Chris Wood, Global Head of Equity Strategy at Jefferies, warned of a potential implosion due to a shift towards debt financing and the risk of a funding break.
He expressed apprehension about the "enormous" amounts being invested in AI by American hyperscalers, with an estimated trillion dollars expected next year. "My base case there'll be massive loss of capital destruction in the U.S.," he said.
At the same time, Rick Rieder, Chief Investment Officer at BlackRock, warned that the $40 trillion national debt is a mounting fiscal burden and noted that Federal Reserve rate hikes carry immediate and severe fiscal consequences for the country. However, he argued that 10-year Treasury yields near 5% could create a favorable environment for fixed-income investors.
Price Action: On a year-to-date basis, Global X Artificial Intelligence & Technology ETF
