Loading summary
Transcript22 lines
- [00:06]
A
After several relatively quiet years, the US IPO market has reopened in a big way in 2026. Issuance so far this year is already at a record high. But this resurgence has raised two big questions. First, is this a late cycle warning sign? And second, can the market actually absorb all this new stock? So the real question is how worried should investors actually be? I'm Allison Nathan, and this is Goldman Exchanges. Each month I speak with investors, policymakers and academics about the most pressing market moving issues for a top of mind report from Goldman Sachs Research. In a recent Exchanges episode, I spoke about exactly this with my colleague in Goldman Sachs research, Ben Snyder, chief US Equity strategist. He explained that the pickup in US IPO activity is more of a return to normal than a true IPO boom. And his view is reassuring in other ways. For starters, the number of IPOs and their average valuations aren't all that exceptional. And what's more, the whole equity supply demand balance this year is in better shape, he says, than most investors give it credit for. This month I spoke with two other longtime watchers of IPO cycles, Jay Ritter of the University of Florida's Warrington College of Business, and Owen Lamont of Acadian Asset Management. I started by asking both whether the current moment actually is an IPO wave, which has often preceded market downturns. They agree that it isn't, at least not yet. Here's what Ritter had to say.
- [01:38]
B
The total amount of proceeds raised this year is setting a record, but the number of companies going public has been still fairly modest since the Internet bubble burst. The number of operating company IPOs averaged only a little over a hundred companies per year, as compared with over 300 companies per year in the 80s and 90s. And I think the two main reasons why there continues to be a relatively modest number of IPOs are first, the big expansion of venture capital and private equity and other sources of equity capital for private companies. Hundreds of unicorns are staying private year after year, and thousands of companies that have private market values of well over a hundred million continue to be private year after year. The other reason I think there's been this continued modest level of IPO activity is that a lot of industries, in particular the tech industry, is an industry where being a small player is difficult. AI it's most obvious where to develop a large language model. It involves enormous billions, tens of billions of dollars of expenditures. The tech industry is an industry where some of the verticals, the narrowly defined industries, have either network effects or big economies of scale that result in the equilibrium Being one or a small number of firms dominating a vertical. So in a lot of the tech industry, getting big fast is more important than it used to be, and being big is more important than it used to be. And as a result, starting in the 1990s, even while the IPO market was booming, there have been exits increasingly for successful VC backed companies that have been trade sales rather than the company remaining independent and going public.
- [03:56]
A
Lamont also says that it's hard to characterize the current activity as an IPO wave, but he sees signs that an IPO and broader equity issuance wave may be forming.
- [04:06]
C
In the past three years, we have been in the opposite of an IPO wave. We have been in an IPO drought. And you can measure that in two ways. You could do it by the number of IPOs, just how many IPOs are occurring every year, or you could look at the dollars of IPOs. What is the total amount of dollars raised on either of those two metrics? Dollars or numbers? We've been in a drought. So this year 2026, we have been still in a drought. If you measure by number of IPOs, if you look at the number of IPOs in the real big IPO waves, such as 1999 or 2021 during COVID there were hundreds and hundreds of IPOs talking about operating company IPOs here, not SPACs, not ETFs, operating companies. There was say about five IPOs every week. So if there's not an IPO happening every business day, you're probably not in a wave. Now, as an economist, I like to think about dollars and not about number of transactions. If you measure by dollars, we had a large ipo, but it takes more than one IPO to constitute a wave. And so I think if there were a bunch of big IPOs, then I'd probably call that a wave. But just one is not enough. And to give you an example, Saudi aramco was gigantic IPO that happened in 2019. And so measured by dollars, there was a huge dollar amount of IPOs in 2019. But it didn't really mean anything. It was an idiosyncratic event, not really reflecting anything about world capital markets. One more thing to add about this. IPOs are about new firms selling equity. And a similar event would be existing firms selling equity, large cap firms issuing equity, which so far they have not been doing that much. They have been repurchasing equity. Usually when you see an IPO wave, you also see an issuance wave by existing companies. And today we're seeing neither of those things. But we might be seeing the beginning of those things.
- [06:06]
A
But with 2026 already a record issuance year, is this a red flag for the equity market? Ritter doesn't think so. So, Jay, you and other economists have found that past IPO booms have often preceded market downturns. So is that a reason to worry?
- [06:22]
B
There is evidence that high new issue volume is a predictor of low future market returns. But like most indicators, it works about 52% of the time. If it was easy to predict markets, there'd be lots of trading strategies that reliably made a lot of money. So there is some predictability there, but as with other measures, it's very limited predictability.
- [06:52]
A
But Lamont is more cautious viewing an IPO wave as one of the, quote, four horsemen of of a market bubble. Here he explains why.
- [07:01]
C
If there is a wave of issuance, again, it hasn't happened yet. But if there is a wave of issuance, that would be a symptom to me that the market is overvalued and we're in a bubble. And the reason is that firms are smart and firms want to sell equity when equity is overpriced. If you're trying to diagnose whether the stock market is overpriced, there's many signals you could use. Just one symptom is not enough. But I would say this issuance symptom or signal is a strong signal, and it worked well in 2021, there was a huge wave of issuance, including IPOs and SPACs, and that was a great time to underweight U.S. stocks. So again, we're not there yet. But if there's a huge wave of issuance and hundreds of IPOs and trillions of dollars of new companies, then I would seriously consider underweighting the US market. But I want to caution, though, that we do see an IPO wave. That doesn't mean that the market is at the top and that you should short the market or get out of the market, because IPO waves and bubbles more generally can last for years. And so that's the danger of using issuance as a signal. It may be a signal that gets you out too early. In Japan, it lasted for years. The IPO wave of the 1990s lasted for years. So it's more like it marks the beginning of the bubble and not necessarily the end. And one thing we haven't talked about yet is the first day pop, which is the change in the price between the offer price and the end of the day price on the first day of the IPO. So typically we see IPOs go up say 15, 20% between the offer price and the end of day close price in big IPO waves, in big bubbles, we see huge pops. We have not seen IPO pops of the magnitude of 2021 and 1999. So that's a sign that we are not in a speculative euphoria.
- [08:49]
A
But could the issuance as a bubble signal be less reliable? If companies are raising equity to fund investment for a transformative technology like AI,
- [08:59]
C
there's plenty of good reasons for any company to issue. Even if they don't think their equity is overpriced, they need the money. So it could be that if we see a wave of issuance, that would be just because they need the money. And they do need the money. There's huge capex needs both for the new companies and the existing companies, the hyperscalers. So they have every legitimate non valuation reason in the world to issue equity. So I want to acknowledge that and say IPOs are good and raising money is good and investing in good projects is good. But historically it's always been the case. We've had fantastic new technology and the Internet was a fantastic new technology in 1999. That doesn't mean it would have been a great idea to buy pets.com or whatever in 1999 or 2000. The other thing I would say is, look, I'm a total AI optimist and I certainly agree with the statement that AI is going to transform society and transform the economy and there's going to be winners and losers. But there's absolutely no guarantee that the winners of AI are the firms that are going public this year. Because the firms that went public in 1998 were not the firms necessarily that benefited most from the Internet. Those were firms that went public in 2003 or 2005, firms like Netflix and Google. They went public much later. And historically, when we've seen huge waves of IPOs and issuance by existing companies, and when we've seen huge wave of capex, as we saw big capex in the late 1990s as well, those have generally been followed by disappointing returns for equity holders. So throughout history, we railroads, both in Britain and in America in the 1800s, there were huge waves of capex, huge waves of issuance, and followed by disappointment. It could always be different this time, but historically it's not a good sign when you see issuance accompanied by capex.
- [10:46]
A
But the bigger concern may be the market's ability to digest the new issuance, especially after the expiration of equity lockups, which prevent company insiders, founders, and early investors from selling their shares for a set period after the IPO. Ritter thinks these concerns are overblown, arguing that the US capital markets are deep enough to absorb even large IPOs.
- [11:09]
B
US capital markets are big. The ability to absorb big IPOs is enormous. In recent years, publicly traded US companies have been paying out about $600 billion a year in caf dividends. In recent years, although it's going to be down this year, the public companies have been buying back about a trillion dollars worth of stock each year. 1.6 trillion of cash being paid out that needs to be recycled. And so the IPO market, even with large IPOs, is still absorbing just a fraction of the cash being paid out. When lockups expire, definitely more shares will become available to public market investors and that will need to be absorbed by the market. But as long as other equity is being retired, either due to acquisitions or share repurchases, the market can absorb that. In recent years, the share repurchases and acquisitions of publicly traded companies have been more than offsetting new share issuance. That may not be occurring in 2026, partly because some of the big tech companies that have been big repurchasers of shares have instead moved to be net equity issuers. But relative to the overall size of the US Equity market, I don't think there are going to be major effects.
- [12:44]
A
Lamont, for his part, notes that there's a threshold at which increased supply will pressure prices. But he says that where it lies isn't clear.
- [12:52]
C
Prices are determined by supply and demand, and when supply goes up, price goes down. So if the supply of tomatoes goes up, the price of tomatoes goes down. And that. That's economics 100 when. And that's what Adam Smith said was going to happen. So yes, ultimately supply does determine prices. However, if we look at the magnitudes, say in the past 20 years, US companies have been repurchasing their shares. So let's call it 1% every year. That was interrupted by the COVID bubble period. But except for that, that's what happened in the 90s. There was a huge wave of issuance where instead of going down, the number of technology company shares went up 3 to 5% a year. And that happened for several years. So it's possible for the market to digest 5% more shares every year. So I agree that there is some level of supply at which the prices go down, but I don't think we know that a couple trillion dollars here and There is enough to make the price go down, because in the 1990s it wasn't. So we're really exploring the demand for shares, and we're going to keep issuing more shares until the price goes down. There's a famous saying of Chairman Deng Xiaoping about the Chinese reform, which is crossing the river by feeling the stones. And that's what we're doing. We're crossing the river by peeling the stones.
- [14:07]
A
Adding to these concerns is the fact that rising issuance is not just an equity story. Firms are also increasingly turning to debt, primarily to fund the AI buildout. Here's what Lamont had to say about how concerning that is.
- [14:20]
C
Companies have issued tons of debt, especially AI related debt, and not much equity. In fact, they've been repurchasing equity over the past year. So to me, when I see companies issuing debt and using it to repurchase equity, that is a sign that the debt is overpriced and the equity is underpriced, or at least the equity is underpriced relative to the debt. The Magnificent Seven are all issuing tons of debt, but they're still repurchasing. I think that's great. For me, as an equity holder, that is a sign the equity is underpriced. If we come to a place where we see a huge wave of equity issuance and debt issuance, then I can't make any statement about equity is overpriced or underpriced relative to debt. Then I would just say we have a pattern of external finance and companies are raising external finance. And that tells me that the whole company, the whole enterprise value of the company, both the debt and the equity are possibly overpriced. And so that would be a negative sign both for credit markets and equity
- [15:20]
A
markets, whether or not the rise in issuance is flashing warning signs for the broader market. Historically, IPOs tend to underperform in their first few years. So I asked Lamont and Ritter how investors should navigate this. Lamont's advice? Be patient. So, owen, how do IPOs tend to perform during waves? And what's your advice to investors? Navigating the issuance landscape.
- [15:42]
C
So, on average, IPOs underperform if you buy them and then hold them for three years. So IPOs are like bananas. They need to ripen before they're ready. You don't want to eat a green banana. You don't want to buy an IPO in the first month or the first year. That's the fact. That has been true for 60 years. And economists have documented that that's not saying every IPO is overpriced, but on average, IPOs are overpriced. So that's the first thing I'd say. Second thing is, IPOs especially disappoint if they occur during IPO waves. And during IPO waves, we often see unprofitable IPOs that are coming to market. And unprofitable IPOs and young IPOs are generally more overpriced, and you see more of that happening in a wave. So if you're able to buy an IPO on the offer price, that's great because it goes up on average from the offer price. But generally speaking, IPOs tend to disappoint and it's better to wait a year to three years before buying it. I would also keep an eye on the IPO market and if it gets super hot, that would be a negative signal. That would be a signal that you maybe want to underweight US equities. The other thing I would say is that you want to look at the IPO market in conjunction with existing firms of whether they're repurchasing equity or issuing equity. And that gives you a holistic picture of the whole US Stock market. Right now, companies are mostly not issuing a lot of equity if you look on a holistic measure. And so that's a pretty positive measure. But things could change.
- [17:16]
A
But Ritter cautions against generalizing the historical trend. Jay, your research shows that the average IPO underperforms the market over the first few years after listing. So how do you square that with your relatively constructive view on this IPO reopening?
- [17:32]
B
Well, the larger companies going public actually after the first day have pretty much matched the market. The evidence is actually pretty strong. And a pretty good rule of thumb is $100 million of annual revenue. The companies with less than that on average have underperformed. And that's been true decade after decade. On the other hand, companies with at least 100 million in annual revenue on average have pretty much matched the market after the first day. So there has not been underperformance there. It is possible to fine tune things more in terms of does the industry matter a little bit. Tech has outperformed non tech and among tech, whether the company was profitable or not is not a very good predictor of long run returns.
- [18:26]
A
So Ritter's data seems to show that the answer to the question of how IPOs might perform is more nuanced than first appears. I'll leave it there for now. My thanks to Jay Ritter and Owen Lamont. And thank you for listening to this episode of Goldman Sachs Exchanges which was recorded in July 2026. I'm Allison Nathan.
- [18:47]
D
The opinions and views expressed herein are, as of the date of publication, subject to change without notice, and may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. The material provided is intended for informational purposes only and does not constitute investment advice, a recommendation from any Goldman Sachs entity to take any action or an offer or solicitation to purchase or sell any securities or financial products. This material may contain forward looking statements. Past performance is not indicative of future results. Neither Goldman Sachs nor any of its affiliates make any representations or warranties, expressed or implied, as to the accuracy or completeness of the statements or information contained herein and disclaim any liability whatsoever for reliance on such information for any purpose. Each name of a third party organization mentioned is the property of the company to which it relates, is used here strictly for informational and identification purposes only, and is not used to imply any ownership or license rights between any such company Company and Goldman Sachs. A transcript is provided for convenience and may differ from the original video or audio content. Goldman Sachs is not responsible for any errors in the transcript. This material should not be copied, distributed, published or reproduced in whole or in part or disclosed by any recipient to any other person without the express written consent of Goldman Sachs. Disclosures applicable to research with respect to issuers, if any mentioned herein are available through your Goldman Sachs representative or@www.GS.com research hedge.HTML. goldman Sachs does not endorse any candidate or any political party. Copyright 2026 Goldman SA. All rights reserved.