U.S. stocks are set to face their biggest test since the U.S. war with Iran this month, as the long-awaited listing of Elon Musk's SpaceX hits markets just as momentum from the first quarter earnings season is starting to fade and investors are growing concerned over rising inflation pressures in the world's biggest economy.
SpaceX, the first of three mega IPOs expected before the end of the year, is set to begin trading on the Nasdaq on June 12, with an expected valuation of as much as $2 trillion. The group will raise around $86.5 billion from the sale, making it the biggest U.S. listing on record.
The deal will, at a stroke, extract the biggest amount of new cash from U.S. equity markets on record, dwarfing the $21.8 billion raised by Alibaba in 2014 and raising more than five times that amount pocketed by Facebook's blockbuster listing in the spring of 2012. And with a market cap of around $2 trillion, it will vault immediately into the upper echelon of U.S. indexes, falling in just behind Amazon as one of the world's most valuable companies.
But that will also provide a massive challenge to a market that has powered relentlessly higher over the past two months, with a series of record highs that has the S&P 500 knocking on the door of the 8000-point threshold and the tech-focused Nasdaq putting the 30,000-point barrier firmly within its sights.
And some investors are worried that it might be a bridge too far.
"There is no (even vaguely close) historical precedent to such a capital raise, and I think it will place a huge test on the stability of the U.S. equity market," said Rupert Mitchell of Blind Squirrel Macro, a former Salomon and Goldman executive, in a Substack post on the pending IPO.
Mitchell thinks investors will likely need to bid around half a trillion dollars worth of capital, covering the $75 billion IPO and the 15% greenshoe attached to it, for the listing to be deemed a success.
He estimates passive funds will take down around $44 billion, with the remainder of the $86.5 billion left for retail and other investors to digest as markets grapple with the short waiting period from listing on the Nasdaq to its inclusion in the tech-focused benchmark.
But he's also worried that traditional market mechanisms, such as share buybacks from the biggest tech hyperscalers, most of which have been pared back in order to pay for their massive artificial intelligence investment plans, won't be there to support the flood of new shares.
"SpaceX insider stock supply risks becoming a drag on the S&P equity supply/demand equilibrium for many months to come, just as 401k flows and hyper-scaler buybacks slow down as AI capex sucks the life out of most of the real economy," he said.
Others are starting to worry as well.
"Not all high-profile U.S. IPOs have presaged major corrections in the S&P 500," said John Higgins, chief economic adviser for financial markets at Capital Economics. "Nonetheless, this year's hotly anticipated 'AI' deals -- from SpaceX, Anthropic, and OpenAI -- are likely to be a big test of the stock market's strength."
The recent run-up in markets could be worrying in that respect, given that some of the biggest stocks, and those in the so-called Magnificent Seven, have recorded such eye-watering gains.
The Mag 7 index is up nearly 22% since the start of the second quarter, a staggering advance following capital spending plans that nearly all topped Wall Street forecasts, while the PHLX semiconductor index has surged 80% since the start of the year, with historic gains for Intel, Broadcom , Advanced Micro Devices and a plethora of chip stocks.
However, Wall Street will now need to find room for the 19% of SpaceX's public float taken by S&P 500 index funds, in anticipation of its invitation to the benchmark later this year, with funds that track the Nasdaq and the Russell 1000 taking the number to around 24%, according to Rob Du Boff of Bloomberg Intelligence.
Adding in active managers that track those benchmarks takes the tally to around 48%.
Cash into SpaceX will, almost arithmetically, result in cash coming out of the stock market's most liquid names. A reduced lockup period for SpaceX's earlier investors, meanwhile, allows them to exit, in stages, as early as the end of the second quarter.
All of that is likely to put huge pressure on stocks into the summer months, with the next round of earnings not expected until mid-August, and the market's traditional reluctance to add risk as mid-term election campaigning in the autumn weighs on gains.
That said, markets have booked an incredible amount of "buffer" over the past two months, with the S&P 500 up more than 16% over the second quarter and the tech-focused Nasdaq gaining just under 25%.
But Mitchell at Blind Squirrel Macro thinks the big cap tech selling he expects following the SpaceX IPO, as well as the follow-on moves to make way for early investors, will likely allow the equal weight S&P 500 to outpace gains for the benchmark over the back half of the year.
Jay Woods, chief strategist at Freedom Capital Markets, sees this as potentially dangerous for passive investors as well.
"Every retail investor holding an S&P 500 ETF in their 401(k) would become an involuntary SpaceX shareholder, regardless of whether they believe in the story, understand the business, or are comfortable with the risk of a $1.75 trillion unprofitable company with a 5% float and one man controlling 79% of the votes," he said.
"The index wasn't designed to do that," Woods added. "It was designed to reward companies that have already earned their place through profitability, staying power, and the patience of real markets."
