Prioritizing Corporate Earnings Over IPO Volume and Volatility

The current IPO boom is often mistaken for market euphoria, but a systems-level analysis reveals a different reality. While the dollar value of new issues is hitting record highs, the actual number of deals remains near historical averages. The real tension is not in the present, but in the deferred supply of shares, specifically the expiration of lockup periods that will hit the market in 2027. Investors who focus on current index-level volatility miss the underlying structural shift: low correlations between individual stocks are masking significant churn beneath the surface. For the long-term investor, the advantage lies in looking past the headline-grabbing IPO volume to the fundamentals of corporate earnings, which are currently outpacing market growth and providing the actual floor for equity valuations.

The illusion of euphoria vs. the reality of volume

Market participants frequently confuse high dollar-denominated issuance with the euphoric market peaks seen in 1999 or 2021. However, Ben Snyder, Chief U.S. Equities Strategist at Goldman Sachs, points out that the number of deals is tracking close to the 25-year average of 100 per year. The current boom is characterized by a high concentration of large-dollar deals, largely driven by the capital intensity of the AI sector, rather than a broad-based speculative frenzy.

"Although the dollar of volume is quite elevated, although we are seeing an acceleration in activity, to me it still looks like we are a far cry from that level of euphoric sentiment that we saw on those episodes."

-- Ben Snyder

This distinction is important. Systems thinking requires us to look at the reason behind the volume. If this were a bubble driven by retail speculation, we would see a high volume of small, speculative deals. Instead, we see a targeted influx of capital to fund specific technological shifts, supported by a healthy macro environment as measured by the IPO barometer.

The 2027 supply cliff and corporate demand

The most significant downstream consequence of today's IPO activity is the eventual release of restricted shares. Currently, the market is absorbing these new offerings easily because many companies are coming to market with small initial floats.

However, this creates a deferred supply problem. As lockup periods expire, the volume of shares available for trading will increase significantly by 2027. The current equilibrium, where corporate buybacks exceeding $1 trillion effectively offset the supply of new shares, is a temporary state.

"Part of the reason that in our view the demand will outweigh the supply this year is that a lot of these IPOs are coming public with relatively small floats. They are issuing relatively small shares of the company when they first launch, but over time more shares will come to market, investor lockups will expire and that suggests that there will be a lot more supply as we look into 2027 and beyond."

-- Ben Snyder

The hidden disconnect in volatility

Investors often look at index-level volatility to gauge market health, but Snyder notes a structural shift: the index is stable only because of low correlations between individual stocks. While the S&P 500 appears calm, the underlying components are experiencing erratic movement. This suggests that the market is not a single, monolithic entity moving in unison, but a collection of sectors responding to different incentives. Relying on index-level data to make tactical decisions is a failure of systems thinking; the real action and the real risk are occurring at the stock level, driven by leverage in hedge funds and ETFs.

Key action items

• Shift focus to earnings growth: With forward earnings up 17% against a 10% market gain, earnings are the primary driver of value. Prioritize companies with fundamental earnings power over those relying solely on multiple expansion. (Immediate)
• Prepare for 2027 supply dynamics: Monitor the lockup expiration schedules of recent IPOs. The current ease of absorption will likely tighten as these shares enter the public float. (12-18 months)
• Look beneath the index level: Stop using index volatility as a proxy for risk. Analyze individual stock correlations to identify where the actual churn is happening. (Ongoing)
• Evaluate leverage exposure: Be aware that the increase in margin debt and leveraged ETFs creates a feedback loop that will likely worsen volatility if the macro environment shifts. (Ongoing)
• Watch the AI momentum: If AI momentum cools, the IPO barometer, which currently sits at a healthy 140, will likely deteriorate, signaling a need to tighten risk exposure. (Next 6-12 months)