In the 1800s, rival railroads often ran between the same two cities. Then too much track got built, and prices crashed. Spencer Jakab, in Wednesday's Heard on the Street, says this boom may end a different way. It could drown in new shares before it drowns in data centers.
He leans on a paper from the asset manager GMO, by Ben Inker and John Pease. By their math, each time share supply grows 1%, the whole market has tended to lose about 4% of its value the next year. That's if nothing else changes. SpaceX (SPCX) went public in June. Its insiders face lockups, waiting periods before they may sell. As those end, the freed shares could grow U.S. stock supply by about 1% by June 2027. Big AI developers are expected to add a lot more. Jakab adds that the S&P 500's price compared with ten years of earnings isn't far from its tech-bubble record. In that setting, he writes, a 20% drop could look more like the dot-com bust, when stocks fell by half. “Nothing tells us a similar event is off the table,” Inker and Pease wrote.
For 20 years, supply worked in stocks' favor. Through buybacks, companies took more of their own shares off the market than they put on. Mergers made whole companies vanish from the list. Plenty of big ones never listed at all. Another asset manager, Pictet, figures the supply of U.S. public stock has shrunk about 1% a year since 2005. Now the big data-center builders have slowed their buybacks. Meta (META) bought back nearly $150 billion of stock from 2021 through the third quarter of last year, and nothing since. Alphabet (GOOGL) and Oracle (ORCL) went the other way. Each sold tens of billions of dollars of new stock.
Your index fund buys first
Thursday's front page showed where the new shares are going. Nasdaq won 59 listings that raised nearly $120 billion this year through Oct. 16, per Dealogic. The New York Stock Exchange won 32 that raised $20 billion. SpaceX, the biggest IPO ever, supplied $86 billion of Nasdaq's total. Before that listing, Nasdaq changed a rule. Now a big newcomer can enter the Nasdaq-100 index after just 15 trading days. The old wait could run as long as a year. Every fund that tracks the index then has to buy it. On Thursday, Oct. 22, SpaceX fell 9.1% and the Nasdaq-100 fell 2.90%.
Our read
This is an Investments/Risk IN04 story about supply. Earnings move prices, and so does the number of shares for sale. A wave of new stock competes for the same dollars, even dollars meant for companies far from AI. The column's halving case is a warning. Nobody can put a date on it. Meta is held at weight in 20 books, Alphabet in 28 and Oracle in 13. The Nasdaq-100 fund QQQM sits in 4. Nothing added. SpaceX isn't in any book. Our verdict is watch.
Here's the link to your own account. If your 401(k) or IRA holds a Nasdaq-100 fund, the next giant Nasdaq listing can land in it 15 trading days after its debut. That's about three weeks, and you don't get a say on the price. This week, open that fund's holdings list. See whether SpaceX is on it and how much of the fund it takes up. Then check whether your S&P 500 fund holds the same top names. If it does, a slide in those giants hits you twice. Fix the roof while the sun's out. If the overlap surprises you, bring both lists to a review.