SPACEX IPO, TECH STOCKS, AND IMPROVING
MARKET BREADTH
The pricing and trading of something as complicated as the SpaceX IPO was nothing short of impressive. Trading went off without a hitch. The new stock closed up 19% on day one, a good sign. It shows the deal was priced well and the market was ready to accept the terms offered.
As our readers know, we are not fans of buying IPOs – especially after the first trading day. Sure, there are some big successes, but most IPOs falter after the first trading day. The main reason for this is that many IPOs are way overpriced. For example, SpaceX went public at a valuation of 83x 2026 sales and about 60x 2027 projected sales while the S&P 500 index trades at 3.3x sales (source: FactSet). SpaceX will have to show growth that exceeds estimates to keep the stock in orbit.
We are concerned with the massive supply of stock coming to the market starting with SpaceX. Mega-caps Anthropic and OpenAI IPOs are coming next. You can say the number of IPOs is nowhere near record highs, but the total dollar size of issuance will likely dwarf every other year. Besides the issuance of stock through IPOs, corporate buybacks are down considerably and some companies, especially the hyperscalers, are issuing equity to help fund capex. Alphabet just announced an $85 billion equity offering to do just that.
This is all classic late cycle behavior. Minimally, this should put a damper on short-term market returns given the coming surge in IPO volumes. But for now, animal spirits appear alive and well.
Up until the short-term market peak on June 2, technology stock performance did the heavy lifting while non-tech and non-AI stocks did nothing. It is no surprise that most of the 2026 gains are thanks to the tech theme. Technology stocks (along with communication services stocks) now account for 50% of the S&P 500 market cap. The tech sector has a bigger weighting now than at the dot.com peak. This is more late cycle behavior.
A big part of technology, semiconductors, has undergone a severe correction since June 2. Some stocks are even in bear market territory – down more than 20% in this short time span. Many top semi stocks are now trading at valuations below market P/E multiples based on 2026 and 2027 projected earnings. Yet semiconductor company earnings for some of the leaders are expected to triple over the next three years. Despite short-term pain, this sector appears to offer excellent value, in our view.
Can the market indexes go higher without tech and AI? Maybe so because the market has broadened. Which brings us to the next bullet point …
Until recently the A/D line (advance/decline is a measure of stocks advancing versus declining) was falling while the market was advancing. Not a reason to panic but unsustainable in the long-term. The proceeds from tech and AI stock sales appear to be going into other equity sectors which is encouraging. The rotation is not into cash.
Another sign of breadth improving is the resurgence of the equal-weighted S&P 500 compared to the market-weighted S&P 500. In fact, the YTD investment return of the equal-weighted S&P 500 is 3% greater than its market cap-weighted cousin. This is the first time this has happened in years – a very encouraging sign.
… Market analysis is always full of pluses and minuses. Our biggest concern is the massive supply of stock coming to market. Where will the funds come from to buy the new shares? In the SpaceX situation, funds seemed to have come from tech and AI stock sales as well as other space stocks (which as a group were down over 10% last Friday). The OpenAI and Anthropic IPOs will be another test later this year. In the meantime, the market is broadening which is music to our ears. While we are focusing current purchases on non-tech and non-AI opportunities, we are in no way giving up on holding tech stocks. After all, tech and AI are still the main themes of this bull market.