Goldman Sachs Sees a Difficult AI Harvest

October 7, 2025 | Goldman Sachs (GS) CEO David Solomon arguably committed heresy the other day when he stated that he would not be surprised to see a "drawdown" in equity markets over the next one to two years. Such a cautionary statement is certainly prudent for Solomon, but also illustrates the manic aspects of investing in this thing called “artificial intelligence.”

Solomon also cautioned that while some capital deployed into AI will generate significant returns, a substantial amount will not. After all how many electronic parrots speaking to us based upon analysis of past history does any society need?  Solomon also warned that investors are excited and therefore less likely to be skeptical of risks, leading some to overinvest.

Speaking of over-investing, GS remains the most highly leveraged bank in the US, with equity leverage below 7% and growth rates for assets and loans well-above average. As we noted in an earlier missive, GS has half of its $300 billion credit book deployed in exposures to nonbank financial institutions. More, GS has the highest exposure to derivatives of any large bank after Morgan Stanley (MS), but MS has little on balance sheet credit exposure compared with GS.

Source: FFIEC

More than half of the derivatives exposure at GS and MS are interest rate contracts, but the magnitude of the exposure – thousands of times average assets – is eye watering. A tiny unexpected loss on the GS or MS derivatives books could wipe out total equity capital. While MS may have a slightly higher level of derivatives exposure than GS, the latter is a much higher-risk franchise in terms of overall leverage.

Notice that MS and GS are well above the other large banks, with Citigroup (C), then Bank of America (BAC) and JPMorgan (JPM) next in order of derivatives exposure, Wells Fargo (WFC) way down the list, then the rest of the banks and Peer Group 1 below 100% of average assets. Yet the derivatives exposure of the entire group of banks has been falling since 2019. 

The Asset Gatherers: GS, SCHW, MS, AMP, RJF & SF

Below we set up Goldman, Morgan Stanley and the other asset gatherers as we go into Q3 2025 earning this week.  As you might expect, GS is ahead of where it was a year ago in terms of non-interest income, earnings overall and equity market value. Total overhead expenses were up in dollar terms, but the telltale efficiency ratio fell as volumes grew more than expenses. The fact that GS CEO David Solomon is worried about investors taking winning chips off the table is belied by his firm’s aggressive deployment of capital and people as 2025 comes to a close. 

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