Amazing things are happening in technology, and ordinary investors are being invited to get a piece of the action.
With the SpaceX market debut on Friday, the Anthropic and OpenAI initial public offerings in the pipeline, and the sizzling tech stocks already on the market, there’s no shortage of betting opportunities.
Elon Musk ignited a frenzy with his roadshow for SpaceX, promising a future of interstellar riches from artificial intelligence combining spaceflight, satellites and orbiting A.I. data centers. I watched his presentation at JPMorgan and was entranced.
Who am I to say that cheap, virtually limitless A.I. generated from Earth’s orbit won’t happen just as Mr. Musk says it will? Intellectually, I’m willing to contemplate the possibility that he is truly leading the world to a vibrant future, on this planet, on the moon and eventually on Mars.
But from a purely investing perspective, I’m keeping my feet firmly on the ground.
As I’ve pointed out, the price being asked for SpaceX shares was exorbitant, and it rose even higher on its first day of trading. That said, the company’s stock might well rise further over the next few weeks, driven by sheer market enthusiasm. Mr. Musk reserved a double-digit percentage of the I.P.O. shares for “retail,” or ordinary, investors — as opposed to big institutions. A retail allocation of 5 percent or less has been customary in most recent public offerings, according to Jay Ritter, an economist and I.P.O. expert at the University of Florida.
But SpaceX’s price is so high that, for investors coming late to the party, the probability of a solid return in the next several years is low. Historical data provided by Mr. Ritter bears that out.
SpaceX set its own valuation way above an important threshold, a 40-to-one price-to-sales ratio, meaning it would take 40 years of sales to equal the market value at that share price. Stocks valued above that level have rarely made money over the next three years. Because the Anthropic and OpenAI public offerings are still at a preliminary stage, there’s less information about them. But their valuations imply richly priced shares, too.
For investors to accept these prices — as well as those of many other big tech stocks — is, in itself, troubling. It suggests that the stock market has entered perilous territory. If this isn’t already a full-blown bubble, it could easily become one.
Still, I’m not getting out of the stock market entirely, because stocks have been great for the long term, and because I can’t forecast market movements with any accuracy. But some times are riskier than others for stock market investors — and this may be one of those times.
The Bubbly Market
I am not too worried, for now, about the direct effects of the mega I.P.O.s on retirement investments. Either they won’t be represented for a long time in broad, diversified index funds — the S&P 500, for example — or they will make up a tiny proportion of assets held by investors.
The CRSP market indexes, now run by Morningstar, will hold the I.P.O.s soon, which means that Vanguard Target-Date Retirement Funds based on one of the indexes will have small dollops of the newly public companies within weeks. But the indexes will include them only in proportion to the shares actually for sale in the marketplace. That’s known as their “float,” and it will be minuscule. Even if the shares fall sharply after inclusion, they will barely move the overall index, and anyone’s retirement funds (including mine, in New York Times retirement accounts) will barely be affected.
The Nasdaq-100 is a different matter. That tech-heavy index will hold SpaceX and the other two big I.P.O.s quickly, perhaps within 15 trading days. Funds based on that index typically serve as proxies for bets on the tech market and not as core retirement investments. Nasdaq-100 funds, like the Invesco QQQ, enable traders to move rapidly in and out of the tech market, as waves of frenzy ebb and flow. That’s not my thing.
The trillion-dollar I.P.O.s do worry me, but for another reason. My concern is that stock offerings of this remarkable size are coming to market only because A.I. stock prices have already risen through the roof. The I.P.O.s aren’t merely lavishly priced. They represent a dangerous moment for the stock market.
There have been some stock market declines lately, but the information technology sector of the S&P 500 traded this week at a price-to-earnings ratio over 39, according to FactSet. That’s a very high level.
Tech company earnings are growing rapidly, but even so, the sector is immoderately priced. The overall stock market has been riding on the momentum of A.I. companies, making the entire market vulnerable. Rising bond yields, geopolitical turmoil and soaring inflation threaten the market, and further tumbles would hardly be surprising.
In an unusual warning on June 5, Bank of America’s stock strategists, led by Savita Subramanian, warned that the S&P 500, and tech stocks in particular, was overpriced and suggested that investors “take profits.” For the rest of this year, the strategists said, the S&P 500 is likely to fall modestly. Such a decline might seem painful. But in my view, after the market rally of the last few years, a small drop could be healthy if it forestalled the creation of a mammoth bubble.
History Lessons
How much irrational exuberance is being unleashed in the furor over SpaceX and the prospective I.P.O.s from Anthropic and OpenAI can’t be known until the new stocks are seasoned and have been trading on the market for a while.
But the signs of an incipient bubble are there. The most important financial questions may be how far current market excesses will go, as well as which companies will survive and prosper as new technologies are let loose on the world.
History provides some context. After the swelling of the dot-com bubble to unsustainable proportions, the market crash lasted 30.5 months, from March 24, 2000, to Oct. 9, 2002. The S&P 500 fell 49.1 percent from top to bottom during this stretch. Investors who stuck with the S&P 500 index were still hurting a decade later. But companies like Amazon, eBay, Google and Salesforce survived that crash, and the infrastructure foundations that were laid back then made the current tech boom possible.
Whatever happens in the markets over the next year or two, some companies will prosper because of A.I. technology for decades to come. It’s just that it’s difficult to know now which companies they will be.
Parallels with previous periods of extreme stock market enthusiasm can be overdrawn. It’s true that using some measures, the market has approached levels of overvaluation not seen in decades.
Take the economist Robert Shiller’s CAPE ratio, which measures the valuation of the S&P 500 over long periods. Professor Shiller, a Nobel laureate, designed it as an inflation-adjusted yardstick for comparing stock prices with the average of the last 10 years of corporate earnings.
At the moment, the ratio is as high as it has been since the bursting of the dot-com bubble. But it has been high for years — if not quite this high — and that hasn’t set off steep market declines. Timing the market is difficult. I certainly can’t do it.
But high stock market prices, combined with the relatively high interest rates of the current period, are still significant. They don’t tell us what will happen next week, but they do suggest that stock market returns will be subdued in the years ahead. Vanguard, which uses methodology derived from Professor Shiller’s work, projects constrained stock market returns for those reasons.
Over the next decade, U.S. stock prices will probably increase in a range of 4.9 to 6.9 percent, annualized, compared with a return of about 13 percent for the Vanguard Total Stock Market Index fund over the last decade, the company said in its latest estimates, produced in April. Small, beaten-down value stocks will probably outperform large-capitalization stocks, including tech stocks, in the United States, and stocks in foreign markets are likely to outperform those in the United States, Vanguard said.
Perhaps the most noteworthy forecast is that bonds will lag the stock market by only around one percentage point, and with far lower risk of major declines. In short, bonds look like a relatively good value right now. Tech stocks do not. And the mega I.P.O.s look especially expensive.
So instead of jumping onto the I.P.O. bandwagon at this point, it might be wiser to assess whether you are already excessively exposed to A.I. through funds that hold big tech stocks. Perhaps this is a good time to rebalance, by reducing your U.S. megacap stock allocations, shifting some holdings into bonds and cash and diversifying globally, using low-cost index funds.
SpaceX, OpenAI and Anthropic might be as great as their founders say they are. If so, I expect that it will be possible to buy them at favorable prices down the road, after the buzz has died down.
Right now, as I noted last week, the only certain thing coming from the SpaceX I.P.O. is that Mr. Musk will be enriched by it, much as he has been at Tesla.
For the rest of the investing public, it may be better to just watch the market spectacle and hold enough bonds and cash to ensure some restful summer nights.
