The macroeconomic backdrop for IPOs in the U.S. is improving as stock market prices stabilize and confidence increases among corporate executives, according to Goldman Sachs Research.
The GS IPO Issuance Barometer has risen to 93, a level consistent with the typical frequency of IPOs. (A reading of 100 is equal to the median number of realized IPOs historically in a given month). After reaching a trough of 7 in September 2022, the barometer is now at the highest level since March 2022. This measure gauges how conducive the macro environment is for IPOs, and it’s scaled so that 100 is the typical frequency of IPOs. It’s based on five components: S&P 500 drawdown (as measured by how far the index trades from its trailing 52-week high), CEO confidence, the ISM Manufacturing Index, the six-month change in two-year Treasury note yields, and the S&P 500’s trailing enterprise value/sales.
Stabilizing prices in the stock market have been the main driver behind the rebound in the IPO barometer, Chief U.S. Equity Strategist David Kostin writes in the team’s report. The S&P 500 Index of U.S. stocks been relatively calm amid signs of resilient economic growth and the expected end of rate hikes by the Federal Reserve. Kostin also notes that drawdown in the S&P 500 is the most statistically significant driver of IPO activity: The largest peak-to-trough drawdown this year is -8%, compared with -13% on average since 1928. Since the start of second quarter, the maximum drawdown has been just -3%. At the same time, price swings in the stock market have moderated — the VIX, which measures the implied volatility of the S&P 500, dropped below 15, the lowest level since prior to the pandemic. While the S&P 500 has now reached a new 52-week high, it remains 10% off its all-time high in January 2022.
The barometer has also been buoyed by other components it’s based on. CEO confidence has improved, even though the median professional forecaster gives a 65% probability of recession over the next 12 months. Shorter-term Treasury yields have reached a peak amid signs that the Fed is close to the end of its hiking cycle. Stock valuation multiples, meanwhile, are still elevated by historical standards. The ISM manufacturing index is the only variable in the barometer that hasn’t improved since September 2022.
And while the improving macro backdrop hasn’t translated into IPO activity yet, follow-on stock offerings, which take place after a company has gone public, have been more resilient. There have been eight U.S. IPOs of more than $25 million this year, not including SPACs and spin-offs. Those deals raised a total of $2.4 billion in gross proceeds, compared with $3.8 billion during all of 2022.
Our economists’ forecasts — which project a 25% chance of recession in the next 12 months — indicate the environment for IPOs could improve further in the second half of the year. Analysts in Goldman Sachs Research also recently raised their S&P 500 year-end price target to 4500, representing about 2.5% upside from the current level. In the event of a “soft landing” for the U.S. economy — characterized by stable equity prices and interest rates, modestly improving CEO confidence, an uptick in the ISM Manufacturing Index, and flat valuation multiples — the IPO Issuance Barometer would equal 119 (compared with 93 as of May 31), signaling an even more supportive backdrop for IPO activity.
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