Analysis by Juan Carlos Ureta
The stock markets have passed the test of SpaceX’s mega-IPO with flying colours, but what is most interesting is not so much that they have passed this test, but the sense that the financial markets are ready to face the investment cycle that lies ahead, a cycle in which financing needs are set to reach a scale never seen before.
We are facing an economic cycle that requires enormous investment, not only due to direct investment in AI, and not only because of the energy required for AI, but because all industries will have to invest and spend vast sums on upgrading their processes, infrastructure and human capital to absorb these changes, and because, furthermore, the three blocs (the United States, China and Europe) want to achieve the greatest possible strategic autonomy, and that entails heavy investment.
All this requires a new scale of financing, which only today’s financial markets can provide; and so the real good news from last week is not so much the success of SpaceX’s fundraising, but the confirmation that today’s financial markets are ready to take on the challenge of financing what lies ahead.
And what lies ahead goes beyond SpaceX. SpaceX’s $75 billion IPO was preceded last week by Alphabet’s ‘express’ capital raise, amounting to no less than $80 billion. A huge figure, even larger than that of the SpaceX placement, half of which ($40 billion) was immediately underwritten by Berkshire Hathaway and other investors, with the other half, which has been secured by the major Wall Street banks, set to be released onto the market in the coming months. Last Thursday, another major tech firm, Oracle, announced a capital increase of $40 billion, and both Anthropic and OpenAI have already registered their respective IPOs, which will be no small affairs. It is certain that other tech firms will also turn to the market to raise the funds they need to avoid falling behind in the breakneck race for artificial intelligence. As has already been done, for example, by Prometheus, Jeff Bezos’s new company, which aims to create AI—not for language but for the physical and sensory world—and which, without going public, has already raised over $10 billion on the private market.
It is true that Alphabet’s share price has fallen by 10% over the last month, essentially as a result of the aforementioned share placement, and it is true that Oracle’s announcement of the share issue has led to a weekly fall in its share price of almost 14%, despite having published excellent quarterly results. But the important thing is that the market is absorbing these share placements.
We are thus moving from a scenario in which large companies, and above all the big tech firms, were buying back their own shares on the stock market through so-called ‘buybacks’, to the opposite scenario, in which the big tech firms issue shares to raise money from the market.
In the world of share buybacks, money was injected into the market; now, in the world of mega IPOs and massive capital increases, money is being withdrawn from the market, and on a scale never seen before. That is what makes it particularly interesting that the SpaceX IPO has been successfully completed, because, in a way, it wasa litmus test of the current capital markets’ ability to absorb the massive demand for funding that is bearing down on them, and because, furthermore, it has served to confirm that the stock markets have definitively entered a new dimension, another galaxy, as Elon Musk would say, the galaxy of mega-IPOs and ‘trillion-dollar companies’.
In this scenario, we are seeing, with increasing frequency, exponential swings in value, such as last Friday’s 11.3% rise in Arm Holdings during the session, or Oracle’s 12% fall during last Thursday’s session, punished by the aforementioned announcement. If a picture is worth a thousand words, that picture could be that of SpaceX’s bell-ringing ceremony last Friday, with Elon Musk at the company’s headquarters in Starbase (Texas) and the company’s president, Gwynne Shotwell, at the Nasdaq headquarters in Times Square (New York), both connected in real time and surrounded by numerous employees and company executives, with Elton John’s ‘Rocket Man’ playing in the background, and a huge screen showing continuous rocket launches into space.
What are the implications of all this for our investments? Is a correction on the way, triggered by an excess of shares? Will the stock markets hold up? Will they even continue to rise? What will the big tech companies do, particularly those linked to AI and semiconductors?
Perhaps what we have been seeing in recent weeks, and what we saw with SpaceX’s IPO, may provide some clues to answering these questions. And what we are seeing is, as we said last week, that the cycle of explosive rises is coming to an end in tech stocks, giving way to a calmer phase and a more stable scenario of sideways consolidation. That is our view and, even at the risk of being wrong,we do not currently foresee major falls in either tech stocks or the rest of the market, but rather an orderly correction of excesses, accompanied by some rotation. This scenario of an orderly correction isthe best antidote to sharp crashes, and it may well be that, at the index level, we continue to seenew highs throughout the summer. Such highs in the indices would be compatible with acorrection of excesses in certain stocks, as we have already seen,
for example, with the stock market correction among defence companies in Europe, which has not prevented new highs on European stock markets, or with the correction among some major US tech firms, such as Microsoft, Meta, Oracle and Tesla, all of which have seen double-digit falls since 1 January – falls that have not prevented the S&P and the Nasdaq from hitting numerous successive all-time highs.
The macroeconomic and geopolitical environments are contributing to this rather positive outlook. On the geopolitical front, the meeting between Trump and Xi Jinping two weeks ago has left the impression that we are moving towards an agreement between the two powers, and the opening of the Strait of Hormuz could be an early sign of this. For the time being, both light crude (WTI) and Brent have fallen below $90 per barrel.
As for the macroeconomy, although we learnt last Wednesday thatUS inflation in April rose to 4.2%—a three-year high—core inflation remains at 2.9%, a very acceptable level, suggesting that if oil prices fall following the reopening of the Strait of Hormuz,inflation might cease to be a problem. Above all, in an environment of economic slowdown, such as that announced last week by the World Bank, which has reduced its global growth forecast for this year to 2.5%, the lowest level since the pandemic. Particularly worrying is the weak growth forecast for Europe (0.8%), which makes the rate hike agreed by the ECB last Thursday all the more inexplicable, however much Christine Lagarde may have presented that hike as a sort of magic cure for any possible scenario. We will have to wait and see whether those beneficial effects of the rate hike materialise, or whether quite the opposite happens.
This week it is the turn of the Fed, with Kevin Warsh taking up his new post. As we have mentioned in previous comments, our impression of Kevin Warsh is very positive and that is one of the reasons for our moderate optimism heading into the summer. The Bank of Japan is also meeting, and no negative surprises are expected there either.
We would expect a quiet week on the stock markets, buoyed by the ‘animal spirits’ that SpaceX’s mega-IPO has awakened in investors.
