An initial public offering (IPO) is a company’s action to go public and put its stock on the open market. Depending on the visibility of the company, IPOs can, at times, attract significant attention. While IPOs often become more common during periods of strong stock market performance, activity remained muted in 2023 even though the S&P 500 gained more than 26%.
“2023’s equity markets generated uneven performance,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. A narrow group of technology-oriented stocks generated much of the market’s positive performance. “In line with the market, investor interest in IPOs appeared to be narrow as well,” says Haworth.
While market performance broadened out to include other sectors in the closing months of 2023, Haworth notes that January’s stock market was again dominated by a narrow group of technology-oriented companies. “The markets are still waiting for IPOs to take off again,” says Haworth, “but there’s nothing major yet on the horizon.”
What is an IPO?
An IPO is the term used to describe the public issuance of stock by what was previously a privately held company. It is one way that private companies seek to raise equity capital. The company makes a percentage of its ownership available in the form of shares of stock on a public exchange. The stock’s price is set for the initial offering. Once the stock goes pubic, it is available to all individual investors.
Historical trends in the IPO market
IPO activity often tends to peak during periods of strong equity market performance. “When stock markets are doing well, investors are receptive to high-growth companies so it’s a more favorable environment for new stock issuance,” says Kaush Amin, head of private market investing at U.S. Bank Wealth Management. “When stock markets struggle, as was the case in 2022, IPO activity tends to slow dramatically.”
While 2023 was an exception, the historical record verifies that strong stock markets are more amenable to increased IPO activity. According to this study, IPO activity — after reaching a two-decade high in 2021 — declined precipitously in 2022, as a bear market took hold. 2022 IPOs dropped to the lowest level since 2008 (another significantly negative year for the stock market). Despite the stock market’s solid recovery in 2023, the number of IPOs increased only modestly.