AI Capex Cycle Drives Investment Banking Business Recovery, Goldman Sachs Maintains Neutral Rating

Overview

This report consists of investor dinner meeting minutes between Morgan Stanley management and Goldman Sachs Group management during the 17th U.S. Financial Conference. Executives including Dan Dees, Co-Head of Global Banking and Markets at Goldman Sachs, attended. Core information confirms capital market recovery remains in early stages; AI-driven capital expenditure supercycle will spawn waves of financing activities across M&A, equity issuance, debt financing, and other sectors. Morgan Stanley views Goldman Sachs as the purest play to participate in this capital market rebound, but given current stock price fully reflects optimistic expectations, maintains Equal-weight (Neutral) rating, target price $1,021.

Core views

The AI capital expenditure supercycle is the core driver of this round of capital market recovery. Goldman Sachs management emphasized that AI-driven demand is expanding from hyperscale tech companies to broader industry sectors, driving comprehensive activity in M&A, equity issuance, debt financing, commodities, and prime brokerage businesses. Currently large strategic transactions lead activity; sponsor participation represents meaningful upside rather than a necessary driver of the current cycle. Goldman Sachs' Capital Solutions Group (CSG) was established in early 2025, coinciding perfectly with this capital expenditure cycle. CSG integrates Goldman Sachs' financing, origination, structuring, and risk management capabilities within Global Banking and Markets, while strengthening synergy with Asset & Wealth Management. This is part of the 'One GS' framework, aiming to more seamlessly connect corporate issuers, private equity sponsors, private credit investors, and asset management capital. Large strategic M&A is driving industry transaction volumes near record levels. Three main drivers include: 1) Scale appetite, market rewards companies that can expand scale, gain pricing leverage, absorb uncertainty, and effectively respond to disruptions (such as AI); 2) Favorable regulatory environment, CEOs generally believe current regulators are more willing to discuss transformational M&A; 3) CEOs unwilling to stand still in the face of disruption; Goldman Sachs believes CEO anxiety about being disrupted (rather than confidence) is a powerful force driving transactions. Sponsor-backed M&A recovery brings upside to already healthy M&A markets. Currently sponsor activity accounts for only about one-quarter; private equity dry powder has grown and aged, increasing pressure to monetize assets. However, management expects sponsor M&A and IPO activity to increase gradually rather than surge suddenly, as sponsors need to return capital before significantly increasing deployment. AI will improve productivity and per capita income over time, but human judgment remains core value. AI has improved and will continue to improve banker workflow efficiency and capacity, but does not eliminate human elements required for client advice, senior review, and prompting skills. AI should improve junior employee work quality, potentially forming a leaner team pyramid structure over time.

Analysis framework

Morgan Stanley's analysis unfolds along the 'Capital Market Cycle Recovery' main thread, acquiring management's direct views on industry trends via meeting minutes, then combining with its own assessment that M&A, ECM, DCM trading volume as a percentage of GDP will revert to historical averages, deriving the conclusion that 2027 global M&A and ECM activity in dollar terms will surpass 2021 records, with DCM activity continuing to grow on top of 2025 record levels. At the valuation level, the firm adopts the PE-PB-ROE triangulation method to set the target price: base case target price $1,021 corresponds to 14.5x 2027 P/E (EPS $70.30), translating to 2.7x book value ratio, corresponding to 19.6% tangible common equity return (higher than the 15-17% target range); bull case target price $1,392 corresponds to 15.5x P/E (EPS $89.82) or 3.5x PB, corresponding to 24.5% tangible common equity return. Although Morgan Stanley's 2027 revenue/EPS expectations are 6%/7% higher than consensus respectively, it believes the current stock price level has reflected its optimism, hence maintaining a neutral rating.

Methodology notes

• Valuation Method

  PE-PB-ROE Triangular Verification Method

  Set target price by mutually verifying P/E, P/B, and ROE to ensure valuation multiples align self-consistently with profitability expectations. In this piece, 14.5x 2027 P/E corresponds to 2.7x P/B and 19.6% TCEP return, forming a valuation anchor.

• Cycle and Prosperity FrameworkProsperity Turning Point Analysis

  Early Stage Judgment of Capital Market Cycle Recovery

  By analyzing historical mean reversion trend of M&A, ECM, DCM transaction volume/GDP ratio, judge current state is early stage of capital market rebound, expect 2027 activity volume to surpass 2021 records.

• Industry/Industrial Analysis FrameworkSupply and Demand Framework

  Financing Demand Expansion Driven by AI Capital Expenditure

  Analyze from demand side how AI-driven capex supercycle creates cross-industry financing wave, demand expands from hyperscale tech to broader areas, pushing IB business line growth.

• Competition and Strategy FrameworkMoat / competitive advantage

  One GS Framework and CSG Synergy Advantage

  By integrating financing, origination, structuring, and risk management capabilities, synergizing with asset management, forming seamless platform connecting corporate issuers, PE, private credit, and AM capital, constituting competitive moat.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Goldman Sachs Group (GS)

  Purest proxy for capital market recovery participation, >60% revenue from Global Banking & Markets, largest investment banking exposure among large banks

  Strengths

  Maintains highest share in M&A market; One GS method brings more cross-company opportunities; Capital Solutions Group provides strategic advantage of integrated financing options

  Weaknesses

  Current stock price level reflects institutional optimistic expectations; Valuation at higher levels

  Comparison

  Largest investment banking exposure among large banks, purest proxy for participating in capital market rebound

  Risks

  Macro economic risks including stagnation and potential market impatience regarding investment progress; Recession leading to growth slowdown and high inflation; Sharp market decline and stalled investment banking business; Rising loan losses; Strategy change execution longer than expected; Increased capital requirements

Key data

• Current Stock Price$1,062.75Close price on June 12, 2026
• Target Price$1,021.00Base Scenario, Corresponds to 14.5x 2027 P/E
• Bull Case Target Price$1,392.00Corresponds to 15.5x 2027 P/E, 31% upside from base scenario
• 2027 EPS Expectation$70.30Morgan Stanley Estimate, 7% higher than consensus
• 2027 Revenue Expectation—6% higher than consensus
• 2026-2027 ROE Expectation15%-16%Within Goldman Sachs mid-term target range of 14-16%
• Global Banking & Markets Revenue ShareOver 60%Goldman Sachs is the largest investment banking exposure among large banks
• Sponsor M&A Activity ShareAbout 25%Sponsor activity accounts for only about one-quarter in current M&A market

Impact & implications

For Goldman Sachs, as the institution with the largest investment banking income exposure among large banks (>60% revenue from G&BM), GS is the purest play to participate in this capital market rebound. CSG establishment timing coincides with capex cycle, One GS framework bringing more cross-business opportunities. For the industry, Morgan Stanley expects M&A, ECM, DCM trade/GDP ratio to revert to historical mean by 2027, meaning 2027 global M&A and ECM dollar volume will surpass 2021 record levels, DCM activity continues growing on top of 2025 records. But current stock price level has reflected institutions' optimism degree, so maintain neutral rating instead of upgrade.

Risks

• Stagflation risks and potential market impatience regarding investment progress
• Economic recession leading to slowed growth and high inflation
• Sharp market decline and stalled investment banking business
• Rising loan losses
• Strategic change execution longer than expected
• Increased capital requirements
• Geopolitical risks

What to watch

• Goldman Sachs Q2 Earnings Release and Call on July 14, 2026
• Normalization process of M&A, ECM, DCM trading volume to GDP ratio
• Gradual recovery rhythm of sponsor M&A and IPO activity
• Actual improvement effect of AI on banker work efficiency and per capita income
• Fed interest rate cut pace in 2026 (expected once in September and December)