Is this another IPO boom signaling a market top? Lyft recently came public but had a disappointing IPO. Shares were priced at $72, traded as high as $88.60 on the first day of trading, and currently trade at $57. More IPOs are on the way. Coming soon are Uber, Pinterest, Slack Technology, and Zoom Video Communications. Is it starting to look like 1999 and 2000? Not at all. So far in 2019 we have had 35 IPOs in the U.S., down 17.5% from last year’s pace. Compare that count to 528 IPOs in 1999 and 406 in 2000. We are not even close to a surge in IPOs. In fact it is more like the equity IPO market is returning from the dead.
It is exciting for investors to think an IPO could turn into the next Alphabet (Google), Amazon, or NetFlix. But most IPOs fail as investments, especially for those investors who can’t buy at the IPO price but rather buy at higher prices on the first day of trading. See our archived short take on IPO investing: https://www.clearviewws.com/why-we-dont-invest-in-initial-public-offerings-ipos/.
Why The Stock Market Has Done So Well This Year
As of April 8th, this year marks the fifth best start to a year for the S&P 500. It’s also the best start to a year since 1987. What can we expect for the rest of the year after such a strong start? Based on history, about 85% of the time stocks continued higher with a median gain for the rest of the year at about 8%.
Why has the stock market been so strong this year? It’s a combination of forces that led to its breathtaking rally. In our view, the number one reason is a more dovish Fed. Further rate increases are off the table through 2021 according to a recent Wall Street Journal survey of economists. Other reasons include the reduced chance of a recession, strong Q4 2018 earnings, lower interest rates for longer, and a bounce back from deeply oversold levels in December. Of course, it’s never easy to see these factors in advance which is why market timing is so difficult and not attempted by most successful long-term investors. One concern we have is that investors have become Fed complacent. New talk of a Fed rate hike could spin investors heads around and cause the market to re-price lower. The key here for any future Fed action is a change in inflation expectations. Our non-consensus view is that there is a 50/50 chance of a Fed rate hike later this year.
Lower Earnings Forecasts Should Be Easy To Beat
Earnings forecasts for 2019 have been sharply downgraded since last fall. More modest single-digit earnings growth is now projected. Here are the consensus estimates by quarter and for calendar 2019 (source: FactSet):
| Earnings Growth % | Revenue Growth % | |
| Q1 | (3.9) | 4.8 |
| Q2 | 0.1 | 4.5 |
| Q3 | 1.7 | 4.3 |
| Q4 | 8.3 | 4.8 |
| CY 2019 | 3.7 | 4.9 |
Notice the year is back-end loaded making the CY 2019 number appear too optimistic to many analysts. But given the constant downward revisions, the bar has been set low. We expect earnings growth to be stronger than these forecasts (one reason being the Q1 GDP forecast has surged to 2.3% by the Atlanta Fed’s GDPNow). Early estimates for 2020 show 11.6% expected growth in earnings.