European companies are facing rising borrowing costs as mounting sovereign debt concerns collide with a surge in financing demand from US technology giants, potentially squeezing corporate earnings and forcing businesses to reconsider investments and shareholder payouts, according to Goldman Sachs.
The pressure is emerging from two directions. Rising government bond yields are increasing the benchmark cost of borrowing across Europe, while major US cloud and technology companies are issuing more debt to finance their artificial intelligence infrastructure expansion, intensifying competition for capital.
Goldman Sachs expects debt issuance by US hyperscalers to rise from $250 billion in 2026 to $420 billion in 2027. Global AI project financing could also double to $300 billion as technology companies increasingly turn to bond markets to fund data centers and other computing infrastructure.
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The growing financing requirements come as investors demand higher returns to hold government and corporate debt, reflecting concerns about public borrowing, inflation and the sustainability of spending commitments across major economies.
France has become a prominent source of concern. Yields on its 10-year government bonds, known as OATs, rose above 5% on October 21 for the first time since 2002. The premium over Germany’s 10-year Bund yield subsequently climbed above 177 basis points on October 22, amid concerns that France’s fiscal pressures could spill over into other European markets.
The United States, United Kingdom and Japan have also faced borrowing-cost pressures this year, highlighting how higher sovereign yields can tighten financial conditions even when corporate borrowers are not experiencing an immediate deterioration in their own credit quality.
Goldman Sachs said the increase in borrowing costs is already feeding into company finances. European investment-grade corporate bond yields have risen by about 30 basis points since the start of September to 4.4%, while spreads over the sovereign risk-free rate have widened by approximately 24 basis points to 117 basis points.
The pressure has been more pronounced in the high-yield market, where borrowing costs have increased by around 90 basis points to 7%. Credit spreads have widened by 94 basis points to 354 basis points, raising the cost of financing for companies with weaker credit profiles.
These increases matter because interest expenses reduce the cash available to fund capital expenditure, research and development, acquisitions, debt repayment and shareholder distributions. Companies may be able to absorb higher financing costs when revenues and operating profits are growing rapidly, but the burden becomes more difficult to manage when earnings momentum weakens.
According to Goldman Sachs, interest expenses among STOXX 600 companies have increased from 1.25% of sales in 2022 to 1.85%. The 60-basis-point increase has reduced earnings by more than 5% over that period, the bank’s analysts estimated.
The effects are unlikely to be uniform across the market. Companies with substantial cash reserves, strong operating margins and limited near-term refinancing requirements have more flexibility to absorb higher interest costs. Businesses with weaker cash generation, limited pricing power or significant debt obligations face a greater risk of having to redirect resources towards servicing and refinancing their borrowings.
Debt maturity timing is notable. Goldman estimates that the average maturity of STOXX 600 corporate debt is around seven years, but approximately one-quarter must be refinanced within the next two years. A further quarter consists of floating-rate debt, whose interest costs can adjust as market rates change.
“The average maturity of Stoxx 600 debt is around seven years; one quarter must be refinanced within the next two years and a further quarter is floating-rate debt,” Goldman analysts said.
“Higher rates could therefore feed through to around half of the debt relatively quickly.”
That exposure creates a lag between changes in market yields and their full effect on corporate finances. Companies that secured long-term borrowing at lower rates may remain insulated for now, but those approaching refinancing deadlines could face materially higher interest payments. Floating-rate borrowers can experience the impact sooner.
AI Borrowing Adds Competition for Capital
The expansion of AI infrastructure is adding another layer of pressure. Hyperscalers are raising funds to support data centers, advanced chips, networking equipment, and related infrastructure, creating a large and growing source of demand for debt capital.
The projected increase in hyperscaler issuance to $420 billion in 2027, alongside a potential doubling of global AI project financing to $300 billion, illustrates the scale of funding required to sustain the industry’s expansion.
For European companies, the concern is not just that US technology firms are borrowing more. Greater issuance can compete for investor capital and potentially require other borrowers to offer higher yields to attract demand, particularly when government debt is already offering more attractive returns.
The AI investment cycle also introduces uncertainty over how capital will ultimately be allocated. If the largest technology companies continue to spend heavily, demand for financing could remain elevated. If investors become more concerned about the returns on AI infrastructure, borrowing costs could rise further for companies perceived as carrying excessive debt or depending on uncertain future revenue.
Goldman Sachs said companies with weak cash generation, limited pricing power, near-term refinancing needs, or substantial floating-rate exposure are especially vulnerable.
“Rising yields increase their financing costs, while wider spreads compound the pressure on those facing near-term refinancing requirements,” the analysts said.
Management teams may consequently prioritize debt reduction over expansion. That could mean delaying investment projects, reducing acquisitions, preserving cash, or moderating dividends and share buybacks. Such decisions could weaken economic activity and equity returns even if companies avoid outright financial distress.
The implications go beyond corporate balance sheets. When businesses redirect cash towards interest payments rather than investment, the effects can reach suppliers, workers and future productive capacity. The risk is relevant if higher financing costs coincide with slowing earnings growth.
Goldman expects European earnings to grow by less than 10% next year, compared with approximately 20% this year. In the United States, it forecasts earnings growth of less than 15%, down from more than 30%.
Slower profit growth would leave companies with less room to absorb higher interest expenses without adjusting their spending plans.
Credit Risks Rise, But Investors See Opportunities in Bonds
Despite the pressure, Goldman Sachs does not expect a systemic credit event. Its analysts pointed to the potential support from easing commodity prices, moderating inflation and interest rates, and improved economic growth in 2027.
The bank instead views the rising cost of debt as a growing constraint for selected companies. That distinction suggests the risk is less about an immediate, market-wide wave of defaults and more about a prolonged squeeze on profitability, investment and shareholder returns.
Mike Bell, head of market strategy at RBC BlueBay Asset Management, similarly argued that higher borrowing costs were unlikely to pose a major problem for investment-grade corporate borrowers. However, he said the environment called for greater selectivity in high-yield credit, where weaker borrowers are more exposed to refinancing pressure.
Bell also sees higher bond yields improving the relative appeal of fixed-income investments.
“The main implication of higher bond yields in our view is that the yields now available on government bonds, investment grade corporate credit, securitized credit and select high yield credit look increasingly compelling on a risk versus reward basis relative to equities,” he told CNBC in an email.
He encouraged multi-asset investors to compare the potential returns from equities with the yields available across fixed-income markets, particularly given elevated cyclically adjusted price-to-earnings valuations in US stocks.
“When we do that, it makes us think that fixed income is starting to look increasingly attractive compared with many developed market stocks,” Bell said.
The shift in relative value could redirect some investor capital towards bonds, increasing the importance of credit quality and the ability of borrowers to service their obligations. Higher yields offer investors better income, but they also reflect the greater compensation demanded for interest-rate, duration, and credit risks.