There Is No Silver Bullet for Market Structure

We recently introduced our new Nasdaq Stockholm IPO Pulse. Today, we update the data for our pair of Nasdaq IPO Pulses through September, giving us a sense of the likely IPO environment in Stockholm and the U.S. into early 2025.

Nasdaq Stockholm IPO Pulse still near recent high

The Nasdaq Stockholm IPO Pulse reached a 2½-year high in June, indicating IPO activity should remain in an upturn. Consistent with that signal, IPO activity also reached a two-year high in Q2.

In Q3, the Nasdaq Stockholm IPO Pulse initially fell, then rose in September (chart below, blue line), and is now near June’s 2½-year high.

Even though the Stockholm IPO Pulse remains in an upturn, IPO activity slowed in Q3. However, that includes some seasonal trends – as many Swedes are on vacation in July and August while their days are long and the weather is warm.

Despite that, Q3 still saw the second most IPOs in the last six quarters (green bars).

Chart 1: The Stockholm IPO Pulse sees a continued upturn in IPO activity into early 2025

U.S.-focused Nasdaq IPO Pulse near recent three-year high

The message is similar for the U.S.-focused Nasdaq IPO Pulse.

In September, the Nasdaq IPO Pulse edged down for the second straight month, falling to a three-month low (chart below, blue line). However, it’s still just below July’s three-year high.

Consistent with the ongoing upturn in the Nasdaq IPO Pulse, IPO activity was little changed in Q3 from Q2’s 2½-year high (green bars). In fact, through Q3, we have seen IPOs for 126 operating companies and 34 SPACs in 2024.

Chart 2: The Nasdaq IPO Pulse sees IPO activity holding up into next year

Rate cuts starting around the world providing tailwind to IPO activity

Interestingly, the upturn in the Nasdaq IPO Pulse had happened in spite of the Federal Reserve’s rate hike cycle.

Now, though, with the Fed pivoting to cutting rates, after 14 months at their peak (chart below, red line), rates should finally become a boost to IPO activity.

With this cut, the Fed joined a number of central banks in cutting rates this year, including Sweden’s Riksbank, the European Central Bank (blue line) and the Bank of England (green line), to name a few.

The Fed appears to just be getting started. The Fed’s projections call for rates falling from 5% now to 3% by the end of 2026. Markets see the fed funds rates getting to 3.4% late next year before plateauing (light red line).

Chart 3: Global rates expected to fall further

Higher rates hurt IPO candidates by worsening valuations and margins

There are a couple reasons why higher rates were a drag on IPOs.

First, they’re bad for valuations. Higher rates increase borrowing costs, making it more expensive to generate future earnings. And, at the margin, worse valuations result in fewer IPOs.

Second, and more immediately, higher borrowing costs hurt margins. This is especially true for smaller companies, which tend to have half their debt floating rate.

We can see the Fed’s interest rate hikes have affected margins at smaller companies much more than at larger companies. In fact, data shows that about 40% of small caps’ debt is floating rate, compared to just 7% for large caps. As a result, the Fed’s rate hike cycle doubled the ratio of interest expense to earnings for U.S. small caps from about 20% to over 45% (chart below, green line). This is the highest this ratio has been this century, aside from a couple recession-related spikes due to falling earnings.

Chart 4: Higher rates especially hurt smaller companies, eating into margins

With headwinds fading, IPO activity to stay in uptrend into 2025

So, with two obstacles to IPOs set to fall away, and both IPO Pulses near their recent highs, the ongoing upturns in IPO activity we’ve seen in the U.S. and Stockholm look set to continue into early next year.