Key insights
- The author expresses concern over high-valuation IPOs from AI companies and SpaceX, questioning the source of capital. With persistent inflation, rising unemployment, and high interest rates, new capital inflow is unlikely. This suggests capital rotation from existing stocks, potentially leading to a broad market selloff. Alternatively, if these IPOs fail to attract sufficient demand, their valuations could collapse, damaging confidence in the AI sector and negatively impacting the broader market. The author sees a potential pitfall regardless of the outcome.
A lot of the AI companies and SpaceX are coming into the market with insane valuations and IPOs. Space X is being valued i read at 1.75 T. Alphabet(google) is raising capital and we have Anthropic and OpenAI which would be hundreds of billions of dollars as well.
IMO, that capital can only really come from two places:
- New capital entering the market 2. Capital rotating out of existing stocks
First one is tough. Inflation is still a major issue in a lot of countries, unemployment seems to be rising, interest rates may stay higher or even move higher, and with wars/geopolitical issues and oil prices still unstable, I don’t see central banks going back to easy money or quantitative easing anytime soon.
So that leaves capital rotation.
But if investors rotate capital into these huge AI IPOs, then money has to come out of somewhere else. That could mean selling existing tech winners, index holdings, or other parts of the market. In that scenario, the broader market could take a sizable hit, and retail investors would probably feel the worst of it.
On the other hand, if there isn’t enough capital rotation and these IPOs don’t get the demand they need, then the valuations of these AI companies could get shattered. That could damage confidence in the whole AI trade and still lead the market lower.
So I’m confused. From where im looking its a pitfall either side we fall to.
Either:
- capital rotates into the new AI names and the rest of the market sells off, or * capital doesn’t show up in enough size, the IPOs disappoint, valuations get questioned, and confidence breaks.
Am I missing something here?