The era of cheap capital is over, and the days of relying on burning cash to drive growth have come to an end.

For most of the past two decades, cheap capital has allowed many companies to defer difficult trade-offs. As the cost of capital returns to historical norms, driven by rising fiscal deficits and unprecedented investment demands in AI and energy infrastructure, companies will once again face substantial capital constraints. This shift will have profound implications for strategy. Companies that continue to prioritize growth over the quality of returns will struggle to create value. Those that deploy capital rigorously, invest selectively, and maintain a clear link between their strategy and economic performance will be better positioned to win.

For nearly two decades, the market has been in an era of extremely cheap capital. In the wake of the global financial crisis, central banks around the world cut interest rates to historic lows and injected massive liquidity into the market through quantitative easing. Between 2008 and 2020, the after-tax borrowing costs of many large companies hovered around the inflation level or even lower — in real terms, debt was essentially free.

Today, this environment is changing. Since the beginning of 2022, the Federal Reserve has raised interest rates sharply to combat inflation triggered by large-scale fiscal stimulus during the COVID-19 pandemic. In May this year, the yield on 30-year U.S. Treasury bonds rose to its highest level in nearly two decades, signaling that the capital market is returning to a more normal — and more expensive — state. Several structural factors suggest that this shift is likely to persist. Soaring federal debt, a surge in AI infrastructure investment, and massive spending on the energy system are all intensifying competition for capital and putting sustained upward pressure on long-term interest rates.

As capital becomes more expensive, executives will have to re-learn the lessons their predecessors knew well: Rigorous capital allocation is critical. The tight link between strategy, financial performance, and value creation is equally vital.

Drivers of Rising Interest Rates

It is easy to attribute the recent rise in long-term interest rates primarily to geopolitical instability and renewed concerns in global energy markets. These factors do matter, but deeper structural forces are also reshaping the economic logic of capital. Research from Bain's Macro Trends Group and other macroeconomic analysis firms points to three factors that are likely to keep long-term interest rates elevated in the coming years.

1. Soaring Federal Debt Crowds Out Private Investment

Budget deficits have long put upward pressure on interest rates. However, concerns about the size and trajectory of federal debt have become more acute today. In February this year, the U.S. Congressional Budget Office released its *2026-2036 Budget and Economic Outlook*, projecting that both short-term and long-term interest rates will remain above pre-pandemic average levels, as rising federal debt increasingly squeezes out private investment. Similarly, the International Monetary Fund's *Fiscal Monitor Report* released in April this year concluded that widening fiscal deficits and rising debt levels are likely to exert "upward pressure on long-term interest rates." The report also noted that geopolitical turmoil and energy market shocks could further tighten financing conditions.

2. AI Infrastructure Investment Is Competing Fiercely for Capital

The second — and increasingly important — driver of rising interest rates is the massive capital demand from AI infrastructure investment. Hyperscale cloud providers — such as Microsoft, Google, and Amazon — are investing heavily in data centers, computing power, network infrastructure, and storage to support the rapidly growing AI workloads. MUFG forecasts that capital expenditures of hyperscale cloud providers will exceed $600 billion in 2026, with roughly three-quarters of that going directly to AI infrastructure. These investments are increasingly relying on external financing, as current capital expenditures plus shareholder returns now exceed the cash flow generated by the companies themselves. Overall, the industry may need up to $1.5 trillion in financing in the coming years.

This shift from self-funded expansion to persistent reliance on capital markets has important macroeconomic implications. The same institutional investors that buy U.S. Treasuries also purchase investment-grade bonds issued by large tech companies. As AI-related bond issuance increases the supply of long-term securities, governments and corporations must compete more intensely for capital, putting upward pressure on yields.

This means the post-2008 era of abundant capital may be coming to an end. In its place, we may see an economy that is more capital-intensive and structurally operates at a higher level of real interest rates.

3. Energy Infrastructure Investment Is Exacerbating Capital Scarcity

The capital demand from AI goes far beyond servers and semiconductors. AI also requires large-scale investment in energy infrastructure: transmission networks, power generation capacity, nuclear power plant restarts, cooling systems, and data center land. Research from institutions such as Morgan Stanley, Allianz, and Brenton Financial shows that financing for AI-related infrastructure is increasingly flowing through project finance vehicles, infrastructure funds, real estate investment trusts, securitization markets, and private credit. As a result, its impact extends far beyond the technology industry itself.

Taken together, rising fiscal deficits and surging private investment demand are likely to reverse the nearly two-decade era of cheap capital. By 2030, we expect the weighted average cost of capital for many large companies to return to historical norms and stabilize at a high single-digit level.

Returning to Fundamentals

Years of ultra-cheap capital have changed management behavior. Companies became more tolerant of low-return investments, investors rewarded growth over profitability, and many executives relied heavily on performance metrics that completely ignored the cost of capital. Cheap capital often masked weak fundamentals. But as the cost of capital returns to more normal levels, leaders will need to start managing for value again. That means re-learning the basic principles of business economics:

1. Market Value Reflects Intrinsic Value

In the long run, the best predictor of market value is intrinsic value. Intrinsic value reflects the risk-adjusted present value of a company's future equity cash flows. In Bain's research, we used financial forecasts for 1,700 companies covered by the *Value Line Investment Survey* to estimate their intrinsic value and then compared it with their actual market capitalization. The results showed an extremely strong correlation, with an R² of 0.89 — far exceeding the predictive power of industry price-to-earnings ratios, EBITDA multiples, capitalized earnings, and any other valuation methods we tested. This points to a simple truth: when companies enhance their intrinsic value, they can create sustainable market value.

2. Only Economically Profitable Growth Creates Value

The relationship between economic profit and value reveals an important fact: not all growth creates value. Only growth where the rate of return exceeds the cost of capital generates value. Investments that merely earn back the cost of capital are value-neutral, while those that fail to cover the cost of capital destroy value — no matter how fast revenue grows. WeWork is an example of the risks of pursuing rapid growth in a capital-intensive business with inherently weak return structures. Fueled by abundant funding from SoftBank and other investors, the company charged ahead even as its losses widened and its capital needs escalated. At its peak in 2019, WeWork was valued at $47 billion. Four years later, it filed for bankruptcy protection.

3. Value Is the Best Criterion for Making Strategic Choices

Business ultimately boils down to a series of choices. And intrinsic value is usually the best standard for evaluating strategic alternatives, because it balances short-term performance with long-term growth and investment needs. Take Ford Motor Company's "One Ford" transformation under CEO Alan Mulally as an example. At the time, some investors advocated splitting the company or adopting incremental regional restructuring initiatives that required less investment. However, Ford's leadership concluded that the intrinsic value of a globally integrated automotive platform exceeded the sum of the value of its individual parts. This decision required significant investment and entailed considerable risk. But by eliminating duplicate engineering costs, reducing platform complexity, and improving scale efficiency, the strategy ultimately created far more long-term value than a piecemeal restructuring would have delivered.

For most of the past two decades, cheap capital has allowed many companies to defer difficult trade-offs. As the cost of capital returns to historical norms, driven by rising fiscal deficits and unprecedented investment demands in AI and energy infrastructure, companies will once again face substantial capital constraints. This shift will have profound implications for strategy. Companies that continue to prioritize growth over the quality of returns will struggle to create value. Those that deploy capital rigorously, invest selectively, and maintain a clear link between their strategy and economic performance will be better positioned to win.

Michael Mankins, Matthew Crupi, Zhou Hao | Text

Michael Mankins is a leader of Bain's Organization, Strategy, and Transformation practice and a partner based in Austin, Texas. He is the co-author of *Time, Talent, Energy: Overcome Organizational Drag and Unleash Your Team's Productivity* (Harvard Business Review Press, 2017). Matthew Crupi leads Bain's Corporate Strategy and Finance practice and is a partner based in Dallas. Zhou Hao is a senior global partner at Bain and Chairman of the Private Equity practice in Greater China, based in Hong Kong, China.

This article is from the WeChat official account "Harvard Business Review" (ID: hbrchinese), author: HBR-China, edited by Zhou Qiang, and published with authorization from 36Kr.