In Orbit? On Tech Sentiment and IPOs

Editors’ Note: MarketMinder doesn’t make individual security recommendations. Any mention herein is incidental to the broader point we wish to illustrate.

The starting gun officially fired on one of this year’s hotly anticipated initial public offerings (IPOs) Thursday, with SpaceX filing with the SEC and teeing up a debut as soon as next month. Bloomberg reports OpenAI is hot on its heels, and Anthropic is also rumored to be eyeing a debut. And there are many more beyond the big three, including Oura Health, which also filed Thursday. To say investors seem enthused is an understatement, and it probably won’t surprise you to learn we think some calm is in order. IPOs have a way of disappointing, after all. But beyond that, the IPO excitement collides with a wave of global Tech (and specifically AI) cheer as investors get swept up in hot recent returns. With so much attention on Tech’s run and rampant expectations for more, it is hard to see abundant positive surprise potential there. To us, this elevated sentiment towards the category suggests a reversion to early-year leadership trends, which favored non-US stocks outside Tech, looks nearby.

First, on the actual IPOs, a friendly word: IPO also stands for “It’s Probably Overpriced.” That is not an opinion or analysis on these specific companies, but a general observation based on how these things work. The point of an IPO isn’t to open up big opportunities to retail investors, despite how they are often marketed. Sometimes it isn’t even to raise meaningful capital. Rather, it is to give early investors or founders a payday (and make a boodle of fees for underwriters). We don’t begrudge anyone for seeking a payday. But there are some implications from this for investors.

Namely, you want to buy low. The pre-IPO crowd wants to sell high. If a stock soars on debut and stays there, it means the underwriters priced it poorly, leaving money on the table and hurting their ability to attract more business. What mostly happens, outside some high-profile high flyers, is that IPOs pop on debut and then come down to earth, trailing the market over the next few years. Those who like getting really nerdy might enjoy visiting University of Florida Professor Jay Ritter’s webpage, featuring a trove of data demonstrating the point. Today’s hype reminds us a tad of Facebook’s 2012 debut. As a reminder, it initially faceplanted. That isn’t to say today’s IPOs will drop—it is just a reminder that IPOs aren’t surefire tickets to riches. Investing isn’t about getting rich in a day anyway. It is about building for the long run, reaping compound growth in a diversified portfolio. Perhaps upcoming IPOs will graduate into that, once the hype eventually wears off and their business models are proven. But it should always be about fundamentals, not FOMO.^[i]

We find IPOs useful primarily as sentiment gauges. A surge can indicate sentiment is running too hot, especially if it is a surge of sloppy, unprofitable companies trying to ride more solid offerings’ coat tails. That is generally a sign of a mania, with 2000’s dot-com boom an extreme example. We aren’t at that point yet today, but it is worth keeping an eye on. Sentiment toward IPOs is another. A decade ago, when people feared an influx of high-quality IPOs risked overheating stock supply, that was a sign sentiment was broadly too skeptical.

Today, sentiment toward these IPOs is pretty hot. It isn’t just that folks want a piece of them. The broader view is also a bit dizzy. Some coverage crowed about the windfall the companies with big SpaceX stakes could reap, arguing it is a peripheral benefit for those who own their stocks. The Wall Street Journal checked in with Polymarket’s bets on how big SpaceX could get, with over 70% betting it would pass $2 trillion in market cap on its debut (analysts expect it to be closer to $1.5 trillion).^[ii] Other coverage noted a periphery effect, with other similar companies rallying on the news.

On its own, this isn’t such a big deal. But add in burgeoning Tech sentiment outside the IPO world, like in South Korea, where two memory chipmakers’ hot returns are reeling in local retail investors even as international institutional investors pare back to mitigate concentration risk.^[iii] On our shores, Tech’s leadership since the war in Iran began makes headlines claim it is the one thing saving the US markets and economy from a wartime malaise. The Tech-heavy Netherlands is one of the few European markets back a above pre-war highs. All the talk we saw earlier about Tech’s huge weighting and narrow market breadth being a risk has quieted some. Nvidia’s much-discussed lag now gets cast as a sign it is unloved, not a sign Tech is losing steam.^[iv] China’s weak-performing Tech stocks are cast as outliers, not bellwethers. When sentiment is skeptical, people go looking for reasons to be bearish. These days, the focus seems to be on finding reasons to be bullish.

Don’t get us wrong. We are bullish, too, and we think Tech probably does fine. But “fine” doesn’t necessarily mean “outperform.” Markets tend to move most on the gap between reality and expectations, and Tech, presently, seems to face high expectations. The bar looks much lower for other categories, like the non-Tech portions of Europe and developed Asia. Sentiment is much more skeptical there, laden by false fears of inflation, high debt and possible recession. That leaves a lot more room for results that are just ok or even kinda icky to qualify as positive surprise.

Bull markets climb a wall of worry. Tech’s wall just isn’t that high right now. We aren’t saying sentiment is broadly irrational or that there is an AI bubble or that there isn’t room for Tech to climb. Just that other sectors outside the US appear to have much bigger walls. That is typically a recipe for a leadership shift. It isn’t a timing tool, and we don’t think such shifts are possible to time. But we think it is likely, however fitful and gradual it may be.