• AI crowds out other deals, drags down performance across unrelated tech names
• Record tech issuance, extreme valuations echo past bubble peaks of 2000, 2021
• Fundamentals may reassert themselves amid increasingly FOMO driven demand

Progress between the US and Iran in peace talks will hearten equities investors for a time, but there are growing fears that listed exposure to AI and the industry’s eyewatering economics could lead to a reversal in fortune for stock markets.

Last week, SpaceX finally completed its historic IPO – and there is more to come with OpenAI and Anthropic expected to follow this year.

However, the amount of capital being demanded from these listings alone is without precedent, to say nothing of further liquidity events as lock-ups expire and secondary sales follow. One banker previously noted that his firm had calculated up to USD 200bn of existing SpaceX shares becoming freely tradable in the first six months after the IPO.

Alongside these mega-listings, a swathe of capital raises from listed tech giants like Alphabet and Oracle – as well as a recent USD 7bn cap raise from AI server maker Super Micro Computer – is showing the intensity of the industry’s demand for equity capital, a theme also highlighted by this column last week.

This demand for capital is so great it is impeding investment in other ECM deals.

“There is a risk these AI trades crowd out the rest of the market,” noted the same banker. “We have a sense with so many of our other IPO candidates in related sectors, many who are clients of SpaceX and Anthropic, that they all have to aim for 2027 listings rather than 2026.”

The huge demands of SpaceX this month have been cited as a reason for poor aftermarkets in the case of ERock, listed in New York, down around 13% two days after its USD 600m IPO on 9 June; and Denmark’s InstallatørGruppen, down around 7% from issue price following its own 11 June, DKK 1.1bn (USD 162m) IPO.

US-listed Quantinuum, a manufacturer of quantum computers, has also consistently traded below its USD 60 a share IPO price, despite being in one of the most exciting growth corners of tech outside of AI.

A US banker noted that, in his opinion, the deal had been attractively priced and structured in a way which should have led to significant follow-through after its USD 1.7bn IPO on 3 June.

“There has been a lot of stress around SpaceX and fatigue in the primary market, especially given the peak levels in underlying equity markets,” noted an ECM investor. “ERock was down over 10% a day after IPO and the vast majority of IPOs we have been tracking are underperforming because the buying and investor follow-through just isn’t there.”

Record start for tech accentuates bubble fears

While SpaceX is a hugely diversified business, the total addressable markets identified in its S-1 clearly point to it as a tech business.

Including the USD 75bn SpaceX base deal size (without factoring in any exercise of greenshoe), US tech and tech-related ECM issuance year-to-date sits at over USD 270bn, according to Dealogic – a record haul at this stage of the year.

Even before SpaceX, issuance was at over USD 195bn. On only two occasions in history has tech issuance surpassed USD 100bn at this stage of a year, in 2000 and in 2021.

With Anthropic and OpenAI both set to follow with mammoth IPOs of their own this year, plus other listed companies raising funds for AI capex, there are potentially hundreds of billions of dollars more to be printed from the artificial intelligence industry this year alone.

Global asset managers have the cash balance to absorb this deal flow, as ECM Pulse also wrote last week. The question is whether they want to.

It will not escape eagle-eyed observers that the previous tech issuance years – 2000 and 2021 – were accompanied or followed by deep bear markets for the sector, where the Nasdaq fell around 77% and almost 37% respectively.

The famed Shiller P/E ratio sits now also sits at 41.2x, its highest point since December 1999, again just before the dotcom bubble burst.

FOMO over fundamentals

Both the first banker and the investor noted that the conflict in the Middle East, even before the reported peace deal, had not had the impact on corporate results that had originally been feared. Companies have learnt from the spike in energy costs from the war in Ukraine and have largely come out of this geopolitical crisis unscathed.

Both pointed to this AI issuance cycle as a far greater risk to market health.

“The capital requirements of the industry are frankly enormous and the speed in which these listed AI businesses decide to go out and do these cap raises is extraordinary,” said the first banker. “In a couple of these cases that we know the decision to raise equity was taken by boards two weeks before the raise and had never been mentioned in meetings before.

“The reason frankly is they know there will never be a better time to do it.”

While sellers feel emboldened, many investors feel forced to take part, as a third banker put it last week, adding that many were buying SpaceX holding their nose with one hand to avoid missing out, with the other hovering over the sell button in case the stock’s fortunes turn – never a healthy dynamic for any IPO.

“Our concern for some time on these AI deals is that, in reality, none of these are feasible if you didn’t have an index, or retail, bid, so the market is being used against itself to fund these raises, but the cash has to come from somewhere,” the third banker added.

It is an eerie reminder of the FOMO-driven investment in IPOs in 2021, a painful vintage for many fund managers.

A second investor with positions in several AI companies argued buyside selectivity would likely become increasingly important as spending in the segment expands.

“It’s one thing to believe that AI infrastructure demand will grow, but it’s another to conclude that every company exposed to the theme will be funded indefinitely,” they said.

The first ECM investor pointed to the USD 7bn Super Micro Computer cap hike and the subsequent 38% fall in its share price in reaction to that announcement as an important sign as to the depth of investor concerns over industry financing.

“That was a mess,” he added. “Global GDP looks good despite pressures since the war in Iran but there is serious fatigue and real concern over the sheer amount of capex being put into the AI industry, as shown by the reaction to that deal.”

The third banker noted that the market was about to enter a new dynamic, shifting from the historic growth driver of US equity markets, share buybacks, to a world where the Mag-7 are shifting all available funds to capex and, in many cases, diluting shareholders.

“If you stop supporting your stock with this mechanism and dilute your shareholders for the first time in twenty years, it’s an obvious inflexion point,” he said. “Free cash flow won’t be covering these expenses and although these companies have phenomenal credit ratings, they are not infinite.”

For now, stocks and equity capital markets are defying economic fundamentals that had once seemed as constant as gravity: perpetually loss-making companies with astronomic valuations and never-ending capex requirements have typically made for poor investments.

But if the fundamental laws of equity markets start to reassert themselves on the AI trade, it would send stock markets crashing back to earth.