There’s a theory circulating on Wall Street that a 40% market crash is casting a long shadow over the initial public offering (IPO) pipeline, and that the SpaceX and OpenAI IPOs are largely responsible.
The crash call comes from Mark Hulbert, a long-time analyst who penned a column on the topic (1)for Marketwatch (1) on June 22, citing research from Harvard University economist Xavier Gabaix.
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“SpaceX’s massively successful IPO, along with the expected IPOs of artificial-intelligence giants OpenAI and Anthropic, make a severe bear market much more likely,” Hulbert noted. “And by severe, I mean a drop of almost 40%.”
Driving that prediction is the notion, articulated by Gabaix, that massive IPOs could cause big investors to raid their piggy banks to snap up shares of popular new-issue stocks. In doing so, Hulbert said big market mavens steer tons of cash toward IPO standouts like SpaceX, either for future investment or for the IPO companies’ C-suites to cash in their shares.
“How bearish would it be if the money raised this year in mega-IPOs like SpaceX’s comes from investors selling other stocks and the companies investing in their future growth and/or their founders deciding to ‘take the money and run?” Hulbert asks.
Citing a 2023 (2)University of Chicago study (2) led by Gabaix, the research suggests that taking cash out of the market for big IPOs could drain billions from the stock market, hurtling it into a severe bear scenario within the next year.
Huge IPOs throw a bucket of cold water on the stock market
Other market trackers agree that gigantic new issues like SpaceX (3) ($1.77 trillion valuation) and OpenAI (4) (expected $1 trillion valuation) are a bank account drainer for other stocks.
“When a multi-billion-dollar company hits the public market, it doesn’t magically create new investing cash out of thin air,” Dan Ye, a stock market expert who teaches an “Investing in the Age of AI” course at Johns Hopkins University, told Moneywise. “The money to buy those fresh shares has to come from somewhere.”
In the real world, when a pension fund, a hedge fund, or an everyday investor decides to take a massive position in an OpenAI or a SpaceX IPO, they usually fund it by harvesting cash from their existing winners. “They sell off chunks of their highly liquid, blue-chip holdings — the Apples, Microsofts, and broad S&P 500 index funds of the world,” Ye noted.
