The Fed is ready to cut interest rates, Citigroup predicts a resurgence of US tech stock IPOs
Citigroup predicts that the IPO market for US technology stocks will heat up, with several tech companies planning to go public in the fourth quarter, despite risks of market volatility and economic slowdown. Citigroup executives stated that high-growth stocks are more resilient in an economic slowdown and may attract investor attention. Although the US IPO market has reached $32 billion this year, it is still lower than the same period in 2021. Several banks are looking to increase listing activities by 2025, despite recent stock market volatility affecting the performance of newly listed companies
According to the financial news app Zhitong Finance, a senior banker at Citigroup said that several technology companies are considering listing on US exchanges in the fourth quarter of this year, increasing the potential number of IPOs.
Given the market volatility triggered by the US presidential election, signs of economic slowdown, and uncertainty about the speed of Fed rate cuts, bankers have lowered their expectations for new listings for the remainder of 2024.
However, Paul Abrahimzadeh, Co-Head of North American Equity Capital Markets at Citigroup, stated in an interview last week that technology companies may benefit from the demand for high-growth stocks. High-growth stocks are considered more resilient to economic slowdown, and their valuations typically benefit from lower interest rates.
He said, "Regardless of what chaos may occur in the US macroeconomy, these companies are likely to generate strong reactions."
So far this year, the size of US IPOs has surged to $32 billion, more than doubling from last year, as companies seized the opportunity of the rising stock market. Just two months ago, the stock market was still driving major indices to new highs.
Nevertheless, this year's IPO size is still only a small part of the over $240 billion in the same period in 2021 (before the Fed rate hikes). Bloomberg data shows that this year's IPO size is also lower than the average level of the past decade before the outbreak of the pandemic.
Many banks, including Citigroup, the top global IPO underwriter so far this year, are looking to increase listing activities in 2025. Abrahimzadeh mentioned that this is partly because companies going public have been meeting with potential advisors more frequently.
However, the lack of urgency may reflect recent stock market volatility and some new listings experiencing price declines. While large IPOs have performed well overall, the performance of the market as a whole has been mixed, with Reddit (RDDT.US) rising by 65% and Ibotta (IBTA.US) falling by over 40%.
Abrahimzadeh said, "Due to scarcity value, trades in high-growth, high P/E ratio industries have received significant excess demand, and in many cases, their pricing has been near perfect. Buyers believe that the aggressive valuations in the IPO market are reasonable, largely due to expectations for the performance of listed companies. If companies fail to meet investor expectations, this could lead to post-listing market volatility."
The market generally expects the Fed to start cutting rates next week and continue into next year, which may help stimulate some new listings, especially if the US economy continues to avoid a recession. The derivatives market reflects expectations that the Fed's benchmark interest rate will be cut by a full percentage point before December, falling to around 3% by mid-2025. Currently, the rate is in the range of 5.25% - 5.5%.
Abrahimzadeh said, "The reality is that there is no lack of demand for new stocks. Growth is back in vogue, and with interest rates falling, this trend will only accelerate."