The impending initial public offerings (IPOs) of SpaceX and OpenAI are stirring concerns among analysts that the artificial intelligence (AI) sector could be drifting into bubble territory. This apprehension coincides with a backdrop of rising yields, prompting investors to reassess their expectations for growth, which may take several years to materialize.
Bank of America analyst Michael Hartnett has projected that the arrival of these high-profile IPOs could significantly alter market dynamics. Currently, AI leaders account for about 40% of US market capitalization, but Hartnett suggests that this figure could surge to as much as 48%, eclipsing historic peaks seen during the Roaring ’20s, the Nifty Fifty era, Japan’s economic boom in the ’80s, and the dot-com bubble. Notably, this concentration would still trail the railroad boom of the 1880s.
The bond market is central to this discussion. The anticipated IPOs would require investors to invest in future growth, an endeavor that is becoming increasingly costly due to rising yields. The current inflation environment is already nearing a critical threshold identified by Bank of America. As reported, the Consumer Price Index (CPI) registered a 3.8% increase in April, drawing closer to the 4% mark that BofA identifies as historically detrimental for stock performance. Historically, when CPI surpasses 4%, the S&P 500 has typically experienced a downturn, averaging a 4% loss over three months and nearly 7% over six months.
Nevertheless, the introduction of SpaceX and OpenAI to the market need not signify a definitive peak in stock performance. A historical review by BofA of previous major IPOs indicates a mixed outcome: some have sparked market rallies, while others have launched during periods of market weakness, and several have had little impact on broader market trends. Ultimately, the state of the market at the time of listing plays a significant role in the IPO’s influence.
Current market pressures are already evident, with the 30-year Treasury yield approaching the 5% range, which has historically posed challenges for equities. This situation sets the stage for a critical test of the IPOs. A robust debut for either SpaceX or OpenAI could potentially prolong the bullish sentiment surrounding AI. However, should inflation exceed 4% and yields continue their ascent, market participants will likely grapple with a pivotal question: how much is future growth truly worth as the cost of waiting escalates?
