SpaceX Could Change the Market
We are about to witness a historic supply-and-demand shock in the stock market on a scale Wall Street has never seen. Led by a massive $75 billion SpaceX offering, a wave of mega-capital raises is forcing institutional funds to liquidate existing positions just to get a seat at the table. This reality may have hit the markets last week, but there’s another powerful force at play: rising interest rates. And that’s a double-edged sword for investors: Attractive to investors seeking income and potentially risky for investors seeking growth.
The stock market just priced-in higher interest rates
Last week, the stock market got a reminder that liquidity matters.
Low interest rates, loose monetary policy and government spending have been a steady tailwind for the stock market for nearly two decades. On Friday, it became clear that the Federal Reserve isn’t going to cut interest rates anytime soon.
Why did the market come to this conclusion?
The Bureau of Labor Statistics published its May employment report, which saw nonfarm payrolls surge by 172,000 alongside sharp upward revisions for previous months. Remember, the Fed’s dual mandate is to maintain stable prices and a healthy labor market.
Inflation has been running above the Fed’s 2% target for more than five years. And with a labor market that is now seen as resilient, the Fed now has no reason to lower interest rates. In fact, with a more conservative Chairman in place, the central bank’s bias could shift to a more hawkish stance.
Market expectations shifted dramatically. Traders have priced-out a rate reduction for the upcoming June meeting, and some members of the Committee have suggested a rate hike is more likely than not by the end of the year. Another concern seems to be the massive IPOs set to soak up investor dollars in the coming months. I’ll get to that in a moment. First I want to explain why rising interest rates and a liquidity drain present significant risks to the financial markets.
Why higher interest rates are a risk to the economy and the stock market
Rising interest rates tend to have a cooling effect on the economy and the stock market through a number of powerful forces:
Capital expenditures by business depend on low borrowing costs.
Higher rates make it more expensive for businesses to borrow money to fund growth and make dividend payments.
The housing market slows. After all, people don’t buy houses, they buy mortgages.
Variable rate interest payments on loans and credit cards increase, reducing consumption.
Rising defaults negatively impact banks reducing their capacity to lend.
When interest rates rise, safer investments like government bonds and high-yield cash accounts suddenly become attractive. Money naturally flows out of the stock market into fixed income securities.
Rising interest rates act as a natural cooling mechanism for both the economy and the stock market. By making borrowing more expensive, higher rates put the brakes on business expansion and slow down the housing market, while simultaneously squeezing consumer wallets through costlier credit card and loan payments. As banks scale back lending to manage rising defaults, investors also pivot—shifting their money away from the volatile stock market and into safer, suddenly lucrative havens like government bonds and high-yield cash.
The hyperscalers are a house of cards
Formed by the merger of two prominent London-based financial firms: Panmure Gordon and Liberum Capital, Panmure Liberum is one of the largest independent investment banks in the UK. In their May 14 investment strategy report, they presented in-depth research on the AI expansion, providing some eye-opening insights:
The AI bubble is already 60% larger than the dot-com bubble.
Analysts’ growth expectations are higher than anything seen since the end of WWII.
The vast majority of data center capacity in the US exists only on paper.
Only 4.6% of planned data center capacity for 2030 is under construction.
As for the remaining 95.4% of planned capacity, 18% are firm commitments and the rest are merely announcements by the companies.
The hyperscalers (Amazon, Microsoft and Google) need an additional $2-$5 trillion in annual revenue to justify planned investments.
For perspective, Amazon’s total revenue last year was $717 billion. Google’s total revenue was $403 billion and Microsoft’s was $282 billion, which means they need to double or triple their annual revenue. The conclusion of the Panmure Liberum analysts: “The data centre boom looks like a house of cards.”
SpaceX could change the market
The SpaceX IPO is another liquidity drain looming over the markets. To understand the dynamics here, I want to use an analogy. Let’s say you live in the hottest neighborhood in New York City and there are only about ten apartments available on the market each month. There’s been a consistent trend where there are a few more buyers than sellers and the prices have been bidding up. Now, developers suddenly announce they are building hundreds of brand-new, ultra-modern homes right next door. The dynamic instantly and completely changes. New buyers put deposits on the upcoming builds instead of buying existing homes, and current residents start selling their properties at a discount, abruptly altering the supply-and-demand balance.
We are about to see this dynamic play out in the equity markets on a scale Wall Street has never witnessed before. To put the magnitude of this upcoming capital grab into perspective, total IPO volume for the entirety of last year amounted to roughly $50 billion. In comparison, SpaceX alone is looking to raise an astronomical $75 billion. When you throw into the mix that Google wants to scoop up $80 billion in an offering, Meta is planning a capital raise of similar magnitude, and AI frontrunners Anthropic and OpenAI are each seeking just under $100 billion in the third quarter, it becomes clear—we’re in uncharted territory.
The fundamental question is not whether these heavy hitters will successfully raise the cash—they almost certainly will—but rather what happens to the market value of all other securities when this much capital is simultaneously grabbed from the system.
This unprecedented capital drain comes at a sensitive time, as the S&P 500 has recently pulled off its highs and erased the technical cushion that usually protects the bull market. In a normal environment, institutional investors would step in and automatically "buy the dip" to stabilize things. However, SpaceX and this historic pipeline throw a massive monkey wrench into the gears. If institutional funds need to raise tens of billions of dollars to get a piece of these massive new offerings, they will likely have to sell existing securities to do it. This means the marginal buying power that would normally absorb a market pullback might instead be tied up waiting for these mega-IPOs.
While these critical funding questions get resolved in the weeks ahead, I’ll be watching the markets and my clients’ portfolio and continue to emphasize the importance of risk management and diversification outside of traditional stocks and bonds.
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