Tepid IPO market showing signs of a 2024 rebound
The signs of life shown by the IPO market, especially in the second half of the year, are giving analysts hope that more companies will be enticed to go public in 2024.
Overall, 108 initial public offerings raised about $19.4 billion in 2023, according to Renaissance Capital. That’s up from a dismal 71 IPOs with $7.7 billion in proceeds in 2022, when high inflation and rising interest rates discouraged companies from hitting the market.
This year’s big IPOs included healthcare products company Kenvue in May, British chip designer Arm Holdings in September and footwear company Birkenstock in October. They accounted for more than half the total IPO proceeds, according to Renaissance Capital. Instacart also had a splashy IPO in late summer.
A post-pandemic surge for IPOs was stifled by the highest inflation in four decades in 2022, raising concerns about the economy buckling under the pressure. The Federal Reserve then embarked on a historic round of rate increases to tame inflation, making borrowing more expensive and increasing caution in the IPO market.
The Fed’s preferred measure of inflation, the monthly personal consumption expenditures report, has cooled to a pace of 2.6% from a high of 7.1% in the middle of 2022. Other measures of inflation, such as the consumer price index, reached a peak of 9.1% in 2022.
The central bank fought inflation by raising its benchmark rate from near zero to a range of 5.25% to 5.50%. The Fed has held that range steady for several months and has signaled that it could start cutting rates in 2024. Wall Street is betting that could happen early in the year.
In a reversal from past decades, more college graduates and professionals are moving out of California than coming into it to escape the higher taxes and cost of living.
Cooling inflation and falling interest rates could push the IPO market back toward a more normal level of activity, which averaged 170 IPOs and proceeds of $43 billion from 2017 to 2019.
“While the IPO market’s recovery is still somewhat tenuous, all signs point to a solid pickup in 2024,” Renaissance Capital said in its recent IPO review for 2023.
The IPO market is expected to grow along with the economy. Corporate profits are expected to rise after shaking off an earnings recession. Earnings gains of just under 2% during the fourth quarter of 2023 could be followed by a gain of more than 8% in the first quarter of 2024 and 10% during the second quarter for companies in the S&P 500, analysts forecast.
The Standard & Poor’s 500 index is on track to close the year with a gain of more than 20%.
Wall Street is increasingly expecting the Fed to achieve its so-called soft landing goal by trimming inflation to the central bank’s 2% target without an ensuing recession.
IPO activity could speed up as chief executives gain more confidence that the soft landing will happen, according to a Goldman Sachs analysis.
