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Market Sentiment & IPOs

The optimal timing for an IPO relies on a complex set of parameters. They include the macroeconomic outlook, microeconomic circumstances, the IPO candidate’s financial performance, its capital requirements, equity valuation levels, and stock market sentiment.

Like M&A activity, IPO events are naturally pro-cyclical. In addition, they are seasonal as they follow the rhythms of quarterly financial reporting. But that does not fully explain IPO ‘waves’ or clusters, a phenomenon that has fascinated the corporate finance literature.

In a much-cited paper entitled Why does IPO volume fluctuate so much?(2002) that remains unchallenged, the author reviews close to forty years of IPO activity. They determine that demand for capital and investor sentiment explain a significant amount of the variation in IPO volume. Separately, research suggests that clusters are also caused by a spillover effect, whereby IPOs provide new pricing information that other IPO candidates are keen to leverage.

The dashboard below assesses a few variables revealing clues about US investors’ current mental state. The first four are hardcore factors, followed by technical ones, and ending with softer parameters, including an index linked to the performance of recent IPOs, an investor survey, and social media.

The data indicates that the US stock market is in a constructive mood. But it takes some psychology to understand investors’ psychology. The turbocharged start of the year is a reminder that financial markets are subject to sudden behavioral change. With persistent concerns about 2023 earnings, investors will welcome a market consolidation phase before being eager to invest in new, market-untested companies across sectors.

Based on these considerations, more patience is required. The IPO market might reopen in earnest in the second quarter. This is still at least one quarter earlier than hoped for at the end of 2022.

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