Micah Zimmerman, The Motley Fool
5 min read
Talk of a potential 40% market crash is popping up in financial headlines these days, and it has enough surface logic to be taken seriously.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
Space Exploration Technologies Corp. (NASDAQ: SPCX), best known as SpaceX, just completed the largest initial public offering (IPO) in U.S. history, raising $75 billion at a $1.75 trillion valuation. Anthropic has confidentially filed for an IPO targeting $30 billion at a valuation of roughly $965 billion. OpenAI is expected to follow next year. As exciting as all these big-name IPOs might be, they could also trigger a big drawdown, according to financial commentator Mark Hulbert.
Hulbert’s analysis draws on academic research by Harvard economist Xavier Gabaix and the University of Chicago’s Ralph Koijen, who found that every dollar withdrawn from U.S. equities causes total market cap to shrink by $5. Applied to the roughly $200 billion these three IPOs are expected to raise, that multiplier implies a $1 trillion hit to market value — and separate GMO research correlating IPO volume with forward returns puts the 12-month decline closer to 40%.
Most data makes a 40% crash scenario look unlikely — while making a more targeted, painful correction in specific pockets of the market look very real.
The real mechanism
U.S. money market funds currently hold approximately $8 trillion in assets. Total U.S. equity market capitalization exceeds $50 trillion. The combined raise of all three IPOs represents roughly 0.4% of investable U.S. equity capital. Ed Yardeni, whose 50-year track record as a market strategist commands attention, ran that math explicitly in a client note and concluded that the effect on the overall pool of available investment capital is “manageable” — in other words, the market is large enough to absorb these offerings without a systemic shock.
What the investment banks underwriting these IPOs (and collecting billions in fees to bring them to market) are correctly recognizing is that the capital is there. What they’re understating: The question isn’t whether the money exists. It’s which money moves, and what it moves out of.
Fund managers getting allocations to new positions don’t wire cash from savings; they sell existing positions. And they don’t sell randomly. They sell what most closely resembles what they’re buying. SpaceX, Anthropic, and OpenAI are AI and tech companies, so the capital funding their debuts is coming out of AI and tech portfolios.
