A wave of new stock supply, as companies raise funds to advance their artificial intelligence (AI) strategies, is leading Wall Street to question whether the market has sufficient capital to absorb these shares and how the new equity will affect broader stock performance.
The risk became apparent last Friday when reports that Meta Platforms Inc was considering raising tens of billions through a share sale sent its stock down 5.5%. The Nasdaq 100 index plunged 4.8%, its worst single-day drop in over a year, while the S&P 500 fell 2.6%, marking its poorest performance since last October.
The issue is that Meta is just the tip of the iceberg. According to compiled data, upcoming IPOs from companies like Space Exploration Technologies Corp (SpaceX), Anthropic, and OpenAI could add nearly $4 trillion in market value to the U.S. stock market in the coming months. Demand for SpaceX's offering is already reportedly oversubscribed. Meanwhile, Alphabet Inc plans to raise $85 billion next quarter, primarily through a public share sale, and other tech giants needing funds for AI data centers may follow suit.
"This is something we have never seen before—a supply event of this magnitude in such a short time," said Ano Kuhanathan, Head of Corporate Research at Allianz Trade. "It is a massive supply shock."
Currently, sellers hold several advantages. The AI investment boom is driving revenue growth and sending chip stocks soaring. The Philadelphia Semiconductor Index is up 74% year-to-date, on track for its best annual performance since 2003. Simultaneously, traditional tech firms like Cisco, Nokia, and Dell are regaining investor favor due to the AI enthusiasm.
Consequently, Wall Street observers believe the market will ultimately be able to absorb the new supply.
"There is ample capital in the market to digest not only this year's IPOs but also follow-on offerings from public companies expanding their AI operations," wrote Nicholas Colas, co-founder of DataTrek Research, in a note to clients last week.
One reason the market can temporarily handle these mega-IPOs is that issuers typically sell only a small fraction of their shares. For instance, SpaceX is expected to float only about 4% of its equity. However, this percentage could rise significantly in the coming months as lock-up periods expire, allowing early investors and insiders to gradually cash out.
Goldman Sachs data shows that historically, for large IPOs with an initial free float below 10%, that figure rises to an average of about 46% after one year. This suggests that by 2027, the incremental equity supply from these companies alone could reach approximately $1 trillion.
"Once these companies are fully in the market, the impact will be significant," Kuhanathan stated.
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