Economists Warn U.S. Stocks Face Nearly 40% Drop Amid Giant IPO Wave

Economists warn the U.S. stock market could fall nearly 40% over the next 12 months, citing a surge in large initial public offerings (IPOs). Recent listings from SpaceX (SPCX-US) and anticipated IPOs by AI giants OpenAI and Anthropic are projected to drain significant capital, potentially wiping $1 trillion from the market. Harvard economist Xavier Gabaix, with Ralph Koijen, explains IPOs typically withdraw capital as investors sell existing stocks for new shares. Their research suggests a $1 capital outflow reduces overall market capitalization by $5. If these three companies collectively raise $200 billion, a $1 trillion market value reduction is possible. Harvard Business School's Malcolm Baker notes increased IPO activity often signals irrational exuberance, historically preceding market underperformance (e.g., 1929, 2000). Investment firm GMO's research indicates a 1 percentage point rise in IPO volume relative to total market cap correlates with a 7.5% decline in 12-month returns. Applying this to projections of these IPOs representing ~5% of U.S. market cap, a nearly 40% broad market downturn is modeled.