US Strategy Weekly: IPO Mania

We are more perplexed by the equity market than we have been in a long time. On one hand, the fundamental underpinnings for equities, boosted by sterling first quarter earnings reports, continue to support this bull market. And in our Outlook for 2026 we indicated that it would be a year of positive earnings surprises. This has come to pass, and it remains core to our bullish outlook. Yet even though we expect earnings to remain strong this year, strong earnings have become the consensus view. In short, fewer positive surprises are likely in upcoming quarters. Plus, earnings forecasts are rising exponentially at a time when quarterly earnings comparisons will become more difficult. Nevertheless, with the S&P 500 up 11.2% year-to-date, and up 28% since June of 2025, the S&P 500 12-month trailing operating earnings growth rate is a stunning 22%. In short, valuations have not been stretched this year. More importantly, strong earnings growth is not a characteristic of mania, or a bubble.

On the negative side, the outsized gains in many semiconductor and AI-related stocks make us dizzy and remind us of other over-extended markets. Equally important, a number of impressive IPO offerings are on the horizon. The combination of SpaceX, OpenAI, and Anthropic is expected to raise a total of $4 trillion.

The IPO marketplace has been relatively consistent over the last 25 years, and according to the Securities Exchange Commission, there has been an average of 280 offerings a year which raised an average of $66 billion per year. The exception was 2021 which saw a 120% increase in offerings. A total of 1,078 IPOs raised over $302.7 billion in total proceeds. Some of this IPO excitement was fueled by low interest rates, but new companies were in demand, and the average first-day gain of an IPO was 34%, nearly double the long-term average. Healthcare companies dominated the traditional offerings, but special purpose acquisition companies (SPACs) were the hot item of the year and represented 611 of the year’s listings. See page 3. Sadly, two-thirds of the IPOs that went public in 2021 were trading below their original prices by the end of December.

What makes us think about the 2021 IPO market is that in the next twelve months the combined offerings of three stocks — SpaceX, OpenAI, and Anthropic — are expected to raise a total of $160 billion in proceeds, with a target valuation of $4 trillion. This would be more than 2.25 times the proceeds raised in 2025 and more than half of what was raised in 2021. More importantly, the IPO proceeds raised in 2021 represented a mere 0.6% of total market capitalization. This year is on a path to exceed that. According to the World Federation of Exchanges, total US market capitalization was $82.2 trillion in March 2026. In other words, the $4 trillion in valuation from just these three companies could represent nearly 5% of today’s total market capitalization. That may not sound like a lot, but it would be historic. Moreover, the current IPO pipeline represents a big increase in the supply of stock which should alter the supply/demand balance for equities. And we should remind everyone that active IPO offerings are a characteristic of a market top.

When we get perplexed, we turn to fundamental data. Most major market peaks occur when the trailing S&P PE reaches 29 times or more. But this is not an exact science, and history shows that each successive major top reaches successively higher valuations. Moreover, the S&P PE exceeded 29 times in April and June of 1999, many months before the peak in March 2000. But to ease our mind, we applied a 29 multiple to the IBES 2026 earnings estimate of $339.51. This equates to 9845 in the S&P 500 index. All in all, there are excesses in the current equity environment, but in our view, while it is prudent to be vigilant it is too early to be bearish.

Economic data was mixed this week. First quarter GDP grew 1.6% (SAAR) after a weak 0.5% in the fourth quarter. There was solid contribution from nonresidential private investment, particularly in intellectual property products and equipment and software. Personal consumption was concentrated in nondurable goods and services. Net trade subtracted from growth. See page 4.

Personal income rose 2.5% YOY in April, but real personal disposable income declined 1.1%, the first monthly decline since December 2022. This is a concern. Personal consumption expenditures rose nearly 6% YOY, but the saving rate fell from 3.2% to 2.6%. Consumers are stretched and inflation is taking a toll on households. See page 5.

Our data shows that the steady deceleration seen in income growth matches the trend in adjusted proprietors’ income which declined 1.1% YOY in April. This points to pressure in the small business sector. Both of these trends align with employment growth, which grew a mere 0.2% YOY according to the BLS establishment survey and decreased 0.8% according to the household survey. May’s employment data will be reported Friday. See page 6.

The ISM manufacturing index rose from 52.7 in April to 54.0 in May. All components, with the exception of prices paid, rose for the month. (The decline in prices paid is positive!). The ISM manufacturing survey has been in expansion mode this year after being below 50 for all but three months between November 2022 and December 2025. In other words, the manufacturing sector is emerging from a long period of contraction. This shift should provide a nice boost to the economy. See page 7.

Although 68% of US GDP is tied to personal consumption and 47% is service-driven, the ISM manufacturing index has had a long history of correlating well with both the S&P 500 index and S&P operating earnings. However, the ISM manufacturing index was in recessionary mode from 2022 to 2025 which was a drag on and a risk to the economy. This revival in the ISM manufacturing index should bode well for both corporate earnings and equities. See page 8.

Inflation is the biggest problem the economy faces, and crude oil futures prices are up 41.5% YOY in June. And while this is down from the 84% YOY gain seen two months ago, consumers need to see more improvement. Inflation is what turned real personal disposable income negative in April, a trend that concerns us. Producer price indices for finished goods jumped from 4.3% in March to 6.4% in April and final demand PPI rose from 4.3% to 6.0%. Core PPI for finished goods was relatively unchanged and rose from 3.7% to 3.8%. Ex-Fed Chair Jerome Powell’s favorite inflation benchmark, the PCE deflator, was 3.5% in March and 3.8% in April while the core PCE deflator was essentially unchanged at just under 3.3% in April (i.e., relatively unchanged but up 0.1% after rounding). See page 9. Crude oil prices move relatively quickly through the economy which is why April’s spike in PPI indices suggests higher consumer prices are ahead. And since real personal disposable income is already showing negative growth, this is a major risk. To date, the core PCE deflator at 3.3% and core CPI at 2.8% are not at critical levels. But as seen in the Biden administration, the longer crude oil prices remain high, the greater the risk that this is not a short-term spike in prices, but the start of another inflationary cycle. See page 10.

Gail Dudack

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