With the possibility of a Fed rate cut, will the US IPO market no longer experience a "false recovery" next year?

The Federal Reserve's shift to a dovish stance last week has strengthened market expectations of an interest rate cut. Federal Reserve Chairman Powell did not counter the dovish trading on Wall Street, causing bond yields to plummet and the US stock market to soar. As the S&P 500 index approaches a new record high and the Nasdaq 100 index and Dow Jones Industrial Average have already reached historic highs, the upward trend in the US stock market has expanded from the so-called "Magnificent Seven Sisters" of technology giants to small-cap stocks and other sectors.

This dynamic has also led to market expectations that companies about to go public may accelerate their initial public offering (IPO) timelines. This is good news for capital-intensive industries such as technology and healthcare, as well as the IPO market that is trying to break free from a two-year slump.

Mark Schwartz, Head of IPO and SPAC Consulting at EY Americas, said that with the increase in valuation multiples, the growth rate of so-called "shadow IPO" companies preparing to apply for IPOs is "different from any of the past seven quarters." Schwartz said in an interview, "In the past few weeks, many companies have been hesitant about whether they are seriously preparing for an IPO, but now they are all eager."

However, when the new stock market will see a significant rebound is still a question, which depends to some extent on the decline in the federal funds rate and seasonal factors. The market currently expects the federal funds rate to drop by 75 basis points next year. Data shows that in the 10 years before the outbreak of the pandemic, the average financing amount for US IPOs in the first quarter was the lowest, and about half of the financing amount was raised from April to June. The US presidential election is another timing risk. Schwartz pointed out that there is some disagreement about whether the discussion about IPO recovery will happen before the summer or not until 2025.

Earlier this year, the nascent recovery of the US IPO market sparked some optimism that the IPO market was ready to rebound in the last few months of 2023. However, after the highly anticipated IPO of Arm Holdings (ARM.US) in September failed to fully revive the market, bankers are cautiously optimistic about the return of larger-scale IPOs next year. In early November, the first quarterly reports of several large technology companies that went public in the US this year mostly fell short of profit expectations, weakening the remaining optimism in the IPO market. Klaviyo (KVYO.US) and Instacart (CART.US) both announced disappointing performances, leading to a cumulative drop of nearly 20% in just two days. Arm Holdings also issued disappointing sales guidance. Although the size of the $25.5 billion raised through listing on US exchanges this year has decreased by over 90% compared to the prosperity of 2021, the more stable fundamentals, improved risk appetite, and declining interest rates have raised hopes for increased trading activity. Josh Weismer, Head of Americas Equity Capital Markets at Mizuho, said, "The Fed's policy shift may bring the IPO wave forward to 2024."

Despite historically low IPO volumes at the beginning of the year, Weismer expects trading activity to pick up in the second quarter. He noted that secondary market bids for stocks are rising and the VIX volatility index is approaching its lowest level since January 2020, indicating a relatively calm environment that helps create an incredibly constructive environment for IPOs.

One tricky issue between investors and companies is the gap between private companies' sponsors and management's views of themselves and the price public investors are willing to pay for their stocks. According to bankers and investors, this gap has been narrowing in recent months, but only time will tell when companies will make their debut on public exchanges.

In other words, not everyone is an optimist. Larry Aschebrook, founder of G Squared, is not very optimistic about the potential of recent IPOs, citing geopolitical uncertainties and a series of elections in 2024 as potential negative factors. This venture capitalist believes, "The window will open between Thanksgiving and Christmas in 2024. By 2025, things will become more active."