IPO market slowing, but momentum builds for 2025 rebound: PwC

IPO Services Leader, PwC US

Doug Chu

Capital Markets Advisory Leader, PwC US

The mild recovery in initial public offerings (IPOs) will likely slow around the US presidential election. Companies that are prepared and on-file may look to squeeze in their IPO launch prior to the election if markets sustain recent gains. However, we expect more subdued activity following the election for the rest of 2024, with many companies shelving offerings until 2025.

That said, we view the IPO market as open for companies with the right attributes — appropriate scale, strong growth prospects, profitability or a clear path to profitability, and a track record of already operating like a public company. Given that market windows open and close quickly, it is important for companies to start preparing well in advance to be in a position of strength when opportunity arises.

With a robust pipeline, continued rate cuts and a soft landing — which remains our base case — the IPO market is expected to regain momentum in 2025.

Markets navigate volatility, AI trade headwinds

US stock markets experienced plenty of volatility in the third quarter. The S&P 500 reached an all-time high in July but took a sharp 9% decline in August. However, following the Fed’s larger-than-expected 50-basis-point rate cut in September, stocks quickly rebounded.

While the broader market has shown resilience, with the S&P 500 up 21% year-to-date, the AI trade is facing notable headwinds. Even as AI-related investments surged, many tech stocks linked to AI underperformed.

A deeper trend is emerging. Although companies are significantly ramping up their AI investments, revenue projections are not keeping pace. The three largest hyperscalers, for instance, reported increased AI investments in recent quarters, but all three saw their forward total revenue forecasts decline, underscoring a growing disconnect between AI-driven optimism and near-term financial performance.

Amid rising risks to growth, particularly from a cooling labor market, investors have begun to shift toward defensive sectors — such as utilities and consumer staples — and toward companies poised to benefit from the recent Fed rate cut, like real estate and financials.

IPO market already outperformed 2022 and 2023

Traditional IPO activity started strong in the third quarter, extending the momentum from the first half of the year. Proceeds raised year-to-date have already surpassed the full year figures for both 2022 and 2023. Additionally, stock prices of this quarter’s traditional IPOs rose nearly 18%, outperforming the S&P 500, which rose by 6% in the third quarter.

Six companies went public in July, which included the busiest IPO week since November 2021. The July offerings were led by a cold-storage operator that raised $4.4 billion, making it the largest IPO since the third quarter of 2023.

Activity slowed considerably in August, when there was just one traditional IPO. This slowdown was driven partly by companies seeking more certainty as the Fed continued to debate its first rate cut. Additionally, with the US elections in November, many IPO hopefuls chose to delay their plans until next year.

Overall, the quarter saw 13 traditional IPOs raising $7.3 billion, with broad participation across various sectors. SPAC IPOs continued at a modest pace during the third quarter, despite the increased execution risk SPAC mergers have faced over the past couple years. Eighteen SPACs raised over $3 billion, marking the highest quarterly total since the 2022 first quarter.

The impact of Fed rate cuts

While the US economy ended the first half of 2024 on a strong note, bolstered by resilient consumer spending and business investment, a series of upside inflation surprises earlier in the year complicated the economic outlook. By the end of September, the case for a soft landing strengthened as inflation trended lower, but risks to growth remained. The labor market was cooling while consumer caution was increasing.

The Fed delivered a jumbo rate cut in September, and it’s expected to take a gradual approach to future cuts. The median estimate among Fed officials implies 50 more basis points this year — with 25 basis points expected in both November and December — and another 100 basis points in 2025.

Historically, lower interest rates have been favorable for equity markets, as they reduce company borrowing costs and make stocks more attractive compared to bonds. For the IPO market, rate cuts could have a mixed impact. While cheaper capital may encourage more companies to go public, uncertainty about the timing and extent of cuts could lead some to delay their offerings until the outlook becomes clearer. Sectors more sensitive to interest rate changes, such as real estate and financials, may see increased volatility as investors adjust expectations.

Looking ahead, PwC expects US real GDP growth to slow from 3% annualized in the second quarter of 2024 to 2.3% in the third quarter of 2024. Further labor market deterioration remains the biggest threat to achieving a soft landing.

_{^{Note: IPOs with deal values of less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded from this narrative. Data from SEC filings and third-party databases are as of September 30, 2024.}}

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IPO market slowing, but momentum builds for 2025 rebound