September 18, 2023 | 2 MIN READ

Weekly Market Update

Fed Expected to be on Hold

What happened last week?

  • The S&P 500 lost 0.16%
  • The Dow Jones ticked up by 0.12%
  • The Nasdaq shed 0.39%

This week investors will focus on the Fed’s September 20 rate decision. The economic community expects the central bank to leave its policy rate unchanged at 5.25%–5.50%.

Data on housing should point to signs of stabilization after being adversely impacted earlier on in the Fed’s rate hiking cycle. Leading Economic Indicators (LEI) for August are expected to flash a negative reading for the 17th month in a row. Despite these readings, analysts have been lifting their earnings estimates and the market has treated this as good news.

3 Things to Know

IPO Launches to be Measured

This week’s highly anticipated market debut of a large semiconductor design firm may mark a restart of IPO issuance over the coming quarters.

A ready pipeline of private firms may now attempt to take advantage of this quieter period in markets to raise capital, providing liquidity for anxious investors.

The calmness that allowed the IPO window to crack open follows a period of heightened market volatility.

Aggressive Fed tightening, an uncertain inflationary and economic backdrop, the poor performance of unprofitable firms and a war in eastern Europe have been more than enough to keep late-stage private companies from seeking public listings.

Consistent with the quality theme we’ve pursued in our portfolio guidance, the key to accessing capital markets may be a combination of realistic pricing, profitability and demonstratable growth prospects.

While the IPO tap appears to be opening, we expect only a modest rate of IPO issuance in the near-term. As financing costs remain high and volatile, IPO pricing will be well below 2021 levels.

High-profile listings this year will likely set the tone for the 2024 IPO pipeline. Among US deals raising over $300 million, shares of newly listed companies are up 21% on average since their debuts this year.

This is an encouraging first step for IPO hopefuls.

While market-cap weighted indexing and financial media leave the impression that most IPOs are successful, the average IPO does not outperform over the medium term.

Given this mixed history of post-IPO performance, despite some recent successful IPOs, we are unlikely to see a true wave of IPOs until the highest profile unicorns choose to take the public stage.

Current Slate Provides Good Momentum

As of July 28, there were an estimated 726 “unicorn” companies in the US. These represents all of the privately-held startup companies that achieve a $1 billion post-money valuation in a private round of financing.

And of these, Pitchbook estimates that the current backlog of companies that would have exited via IPO under normal conditions is over 200.

Among these late-stage IPO hopefuls are firms engaged in fintech and payments infrastructure, cyber security, aerospace, artificial intelligence, internet retail, logistics, marketing and education technology.

Realistic re-valuations of later stage venture backed companies is a necessity for the return of a healthy IPO market. The average unicorn last raised capital 17 months ago, at the height of the free-money mania.

Many of these companies are running through their cash reserves and will either need to go public in order to generate liquidity or raise another private round of financing at major discounts to peak values. Therefore, while the pipeline of potential tech IPOs is quite deep, the willingness of those companies to accept current public market valuations is still unknown.

As of this week, only two US unicorns have filed an S-1 to go public. Many late-stage private company CEOs and investors will be watching these debuts in the coming weeks.

Citi Global Wealth Investments
Charlie Reinhard - Head of North America Investment Strategy
Lorraine Schmitt - North America Investment Strategy

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