IPO Trends and Forecasts in an Election Year

Michael Normyle – Nasdaq’s US Economist joins IBKR’s Jeff Praissman to discuss Initial Public Offering or IPO activity during this election year and where it may be trending for the future.

Summary – IBKR Podcasts Ep. 209

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman 

Hi, everyone. My name is Jeff Praissman with Interactive Brokers Podcasts, and it’s my pleasure to welcome back to our show Nasdaq’s U.S. Economist, Michael Normyle. Hey, Michael, how are you? 

Michael Normyle 

Hi, doing well, thanks. 

Jeff Praissman 

It’s always great to have you for our once-a-month podcast on the economy. Today, we’re going to talk about IPO activity. 

So I wanted to kick it off. It’s been an unusual year, right? With the election and having an incumbent president drop out mid-race and then a new candidate come in. Just in general, how has the IPO activity been so far this year in the U.S.? 

Michael Normyle 

This year, and the last couple of years really, we’ve seen IPO activity trending up, but pretty modestly after bottoming in late 2022. Through mid-November, we’ve seen just over 200 IPOs in the U.S. By this time last year, we had seen 145. But if you go back to 2021, which was really the peak we’ve seen in the last several years — really a few decades — we had over 900 IPOs by this time that year. 

Jeff Praissman 

So it sounds like this year is a little bigger than last year but certainly smaller than the year before. Just as far as this year is concerned, as we approach the elections, did IPO activity speed up, slow down, or stay the same throughout the year? 

Just curious about the pattern of it. 

Michael Normyle 

Yeah, we’ve definitely seen a pickup in IPOs. In October this year, we saw 37 IPOs, which is the most in a month since December 2021. But since the election was so recent, it’s hard to say if that’s an increase in IPO activity due to anything related to the election, or if it’s just that IPO activity has been trending up. 

Historically, there is a pattern in election years that’s a little different from non-election years. Historically, elections don’t impact the total number of IPOs in a year, but they do impact the timing. In election years, there’s usually a pull forward of IPO activity into August, September, and October, which tend to see about 30% more IPOs in election years than in non-election years. 

That’s offset by a quieter November, of course, when we have the election. But by December, the number of IPOs becomes indistinguishable between election years and non-election years. 

Jeff Praissman 

Got it. And what sectors are seeing the largest number of IPOs this year? 

Michael Normyle 

We’ve seen the most coming from healthcare, with 40 so far through mid-November. Then industrials, with I think 34 — definitely more than 30. The third most is consumer discretionary, with 26. And though it’s not a sector, we’ve seen 48 SPACs this year as well. 

Jeff Praissman 

So just those three sectors make up a pretty significant portion of the 200 overall. It’s definitely heavily weighted toward those three sectors versus others. Conversely? 

Michael Normyle 

Yeah, the least is definitely utilities, with zero. After that, materials has two, and they didn’t see their first IPO this year until the end of July. Then real estate and energy each have had four so far. 

Jeff Praissman 

Historically, do interest rate cuts influence IPO activity, or do they not at all? 

Michael Normyle 

No, yeah, interest rates are definitely a factor. One reason the IPO environment has been slower compared to 2020 and 2021 is the Fed’s rate hike cycle that began in early 2022 and ended in September this year with their first rate cut. 

There are a couple of reasons why higher rates are a drag on IPOs. First, they’re bad for valuations. Higher rates increase borrowing costs, making it more expensive to generate future earnings. Worse valuations result in fewer IPOs. 

Second, and more immediately, higher borrowing costs hurt margins, especially for smaller companies. Data shows about 40% of small-cap 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%. 

This is the highest this ratio has been this century, aside from recession-related spikes around 2001 and COVID, which were due to falling earnings instead of rising interest expense. Despite other factors being supportive of IPOs in the last year or two, this increased interest expense was a one-two punch for companies considering an IPO. 

As rates fall, this should make it easier for companies to grow profits and improve micro-cap valuations. 

Jeff Praissman 

So potentially we might see a number greater than 200 or 140 in the last few years. Maybe not quite up to 900 right away, but preferably trending that way? 

Michael Normyle 

We can dream at Nasdaq. We’ll see. 

Jeff Praissman 

That’s true. What are some ways people can track IPO activity in the U.S.? 

Michael Normyle 

I’m glad you asked. We have the Nasdaq IPO Pulse, a leading indicator of U.S. IPO activity. It’s something we introduced at the start of this year. It combines six individual leading indicators of IPO activity, including interest rates, into one number — one index. 

It’s designed to anticipate directional shifts in IPO activity, meaning when the trend is likely to change from an uptrend to a downtrend and vice versa. Historically, it leads turning points by about half a year, helping people gauge when the IPO market might improve or face cyclical headwinds. 

If you’re interested in IPO activity elsewhere, we also have the Nasdaq Stockholm IPO Pulse, which leads shifts in IPO activity in Sweden. For updates, we publish quarterly insights on the Market Makers blog on Nasdaq. 

Jeff Praissman 

Great. You beat me to my next question, which was about activity outside the U.S. Many of our listeners not only trade in the U.S. but also engage in Nordic markets. Pivoting again, what about the VIX? 

Is there a relationship between volatility and IPO activity? I have my assumptions, but I’d rather the expert weigh in. 

Michael Normyle 

Yeah, definitely. Volatility is another factor in the IPO Pulse. Naturally, companies prefer to IPO when volatility is decreasing rather than increasing. 

For example, we discussed in our last podcast that volatility tends to increase in the months leading up to close elections due to uncertainty around outcomes. But once that uncertainty resolves, volatility drops. That’s exactly what we’ve seen post-election this time around — another positive sign for IPO activity. 

Jeff Praissman 

One last question. You touched on IPO activity trending for 2025, but with the change in parties, do you think the sectors seeing IPO activity might change, or will they stay the same? 

Michael Normyle 

I think it’s hard to say right now, given the uncertainty around policies. IPO activity, in general, has a lot of cyclical tailwinds. The market is hitting new highs, volatility and Fed rates are coming down, and through September, the IPO Pulse is near its three-year high. 

We should see IPO activity continue its uptrend into early next year. Our next update in January will give more clarity, but for now, things look good for activity staying in an upturn into early 2025. 

Jeff Praissman 

Michael, as always, this was great. I want to remind our listeners that they can find all of our old podcasts or previously aired podcasts on our website, on YouTube, on Spotify Amazon Music- those kinds of distributions that people can listen to upcoming, past podcasts from Michael at Nasdaq from all our other contributors. 

And also, they don’t need to read through a ton of research reports. They can just look at this IPO pulse and get a look at where things are going as well, which is a really nice trading tool for them to use. 

So again, thank you so much for stopping by, always looking forward to it and looking forward to our next one next month.  

Michael Normyle 

Yeah. Thanks for having me.  

Jeff Praissman 

Thank you.