AI investment sparks a wave of financing! Goldman Sachs: U.S. companies are expected to issue a record high in stock by 2026, but buybacks will form a strong hedge.

As artificial intelligence (AI) spending generates significant financing demands, U.S. companies are issuing more stock to investors. According to data from Goldman Sachs Group, Inc., in the second quarter of this year, U.S. companies raised $252 billion through means such as initial public offerings (IPOs), follow-on offerings, convertible securities, and SPACs, surpassing the previous quarterly record of $234 billion set in the first quarter of 2021. Notably, the size of follow-on offerings in the second quarter reached $70 billion; by July, the cumulative size of follow-on offerings for the year had reached $105 billion, the highest level for the same period since 2021. However, Goldman Sachs Group, Inc. strategist Ben Snyder points out that the increase in equity supply is more a return to normal levels rather than an overwhelming surge that threatens the market. Despite the substantial issuance amounts, Snyder noted that the current volume of stock offerings remains below historical averages relative to the overall stock market size. Additionally, this years issuance activity is highly concentrated, with the top three IPOs and follow-on offerings accounting for nearly half of the cumulative issuance as of July. AI Drives Growing Capital Demands Artificial intelligence has become a key factor driving new stock issuances. In a report released on August 7, Goldman Sachs Group, Inc. stated that companies related to AI accounted for approximately 40% of the follow-on equity issuance in the U.S. this year. The technology, media, and telecommunications (TMT) sector made up 28% of the follow-on equity issuance, exceeding the average of 13% over the past five years. As large tech companies continue to build data centers and other AI infrastructure, this financing demand could increase significantly. Market consensus indicates that capital expenditures by hyperscale cloud computing companies are expected to exceed $1 trillion per year over the next few years. In their analysis, Goldman Sachs Group, Inc. identified Amazon.com, Inc. (AMZN.US), Alphabet Inc. Class C (GOOGL.US), Meta Platforms (META.US), Microsoft Corporation (MSFT.US), and Oracle Corporation (ORCL.US) as the main hyperscale cloud computing firms. It is estimated that by 2027, the capital expenditures of these companies will exceed their operating cash flows by approximately $150 billion. Some investors believe that the actual funding gap could be even larger. Goldman Sachs Group, Inc. estimates that if the capital expenditures of hyperscale cloud computing companies reach $1.4 trillion next year, as some investors expect, even with significantly accelerated cash flow growth, these companies will still face a financing gap exceeding $300 billion. Nevertheless, Goldman Sachs Group, Inc. points out that recent financial reports from Amazon.com, Inc., Alphabet Inc. Class C, Meta, and Microsoft Corporation also show that their revenues and operating cash flows still have room for growth. The higher returns from AI investments may help these companies support more capital investments through internal funds. Debt Financing Expected to Bear Major Funding Pressure Stock issuance is unlikely to be the main external source of financing for AI infrastructure development. Goldman Sachs Group, Inc. credit strategists anticipate that hyperscale cloud computing companies will cover 35% of their capital expenditures through debt financing by 2027. This means that global bond issuance could reach approximately $400 billion next year, with a similar scale expected to persist in the coming years. Goldman Sachs Group, Inc. also forecasts that the data center and chip sectors will generate about $300 billion in project financing demand by 2027. However, equity financing will still be part of the funding mix, especially for other AI infrastructure companies. Issuing stock can help companies secure additional funding for long-term investment projects while avoiding excessive pressure on their balance sheets. The pace of stock issuances will also depend on market conditions. Historical data shows that when the overall stock market performs well and corporate stock valuations are high, companies are usually more willing to issue stock for financing. Investors Have Absorbed New Stock Supply New stock issuances typically exert some short-term pressure on stock prices. Data from the past 30 years shows that companies conducting follow-on offerings experienced a median decline of about 2% in their stock prices on the first trading day following the announcement. However, in the following months, stock prices usually begin to recover gradually. Goldman Sachs Group, Inc. found that there is currently no clear evidence suggesting that investors are having difficulty absorbing the new stock supply this year. Recently, the average issue price of follow-on stocks was about 7% lower than the stock price before the announcement, yet the performance of the stocks after the issuance has generally aligned with historical trends. U.S. Corporate Stock Issuance Expected to Set Record in 2026 Goldman Sachs Group, Inc. predicts that U.S. corporate stock issuance will set a dollar amount record in 2026. The bank also forecasts that the total stock supply next year will be around $700 billion, slightly more than $225 billion from IPOs and about $450 billion from other forms of stock issuance. However, this amount would only represent about 1% of the total market capitalization of the Russell 3000 index, roughly equivalent to the annual average during the period from 2015 to 2019. This percentage difference is significant for investors concerned that a wave of corporate financing may exceed the stock market's capacity to absorb demand. Stock Buybacks Create Strong Counterbalancing Force Snyder noted that corporate stock buybacks are expected to exceed new stock issuances, providing stronger support for the market. In the second quarter, the repurchase scale of S&P 500 constituent companies grew by 11% year-over-year. As of the release of Goldman Sachs Group, Inc.'s report, the total authorized scale for U.S. corporate stock repurchases had hit a record $989 billion. Goldman Sachs Group, Inc. estimates that U.S. publicly traded companies will repurchase $1.4 trillion worth of stock this year. This scale will surpass direct corporate stock issuance as well as any additional stock supply that could arise from the end of lockup periods post-IPO. The final market landscape is that AI investments are creating increasing external financing demands, but so far this has not led to an oversupply of stock sufficient to overwhelm investor demand. As Goldman Sachs Group, Inc. summarized in the report's title, stock issuance is a headwind, but not a hurricane.