A 40% market crash is lurking in the IPO pipeline. SpaceX and OpenAI could trigger it.

By Mark Hulbert

Prior records for U.S. equity issuance came in 1929 and 2000 - and we all know what happened next

Investors in established stocks sell shares in order to buy mega-IPOs like SpaceX, weakening the entire stock market.

SpaceX's (SPCX) massively successful IPO, along with the expected IPOs of artificial-intelligence giants OpenAI and Anthropic, make a severe bear market much more likely.

And by severe, I mean a drop of almost 40%.

One reason for this, Harvard University economist Xavier Gabaix explained in an interview, is that IPOs typically represent a withdrawal of cash from the market. Meaning that investors in established stocks sell shares in order to buy IPOs. The sales proceeds go to the newly public companies to invest in their future growth or to the companies' founders wishing to cash in.

Therefore, according to Gabaix, the only way for IPOs to not be bearish would be for the entire amount raised in the offerings to come from outside the stock market (such as from abroad or from bond investors) - in which case their stock-market impact would be neutral.

How bearish would it be if the money raised this year in mega-IPOs like SpaceX's comes from investors selling other stocks and the companies investing in their future growth and/or their founders deciding to "take the money and run"?

Research suggests the IPOs by SpaceX, Anthropic and OpenAI, by raising an aggregate $200 billion, could result in a $1 trillion reduction in the stock market's total value.

According to research conducted by Gabaix and Ralph Koijen of the University of Chicago, every dollar withdrawn from the U.S. stock market causes the total market cap of the entire market to decline by $5. Based on the size of SpaceX's IPO and estimates of the valuation of OpenAI's and Anthropic's expected IPOs, the three companies collectively would be raising around $200 billion, which in turn implies that their IPOs could result in a $1 trillion reduction in the market's total value. (This $200 billion estimate refers to the amount of money actually raised in the IPOs - not the market caps of the newly public companies.)

Another reason these mega-IPOs could have bearish consequences is related to investor sentiment. Malcolm Baker of the Harvard Business School said in an interview that heavy IPO volume frequently reflects irrational exuberance on Wall Street, and the stock market almost always produces below-average returns in the wake of such exuberance. Prior records for U.S. equity issuance came in 1929 and 2000, for example. We all know what happened next.

Regardless, there is strong statistical support for this outcome, according to research conducted by the investment advisory firm GMO. It measured this correlation by focusing on the percentage of the stock market's total market cap represented by IPOs in a given month. A 1% increase in that percentage was correlated with a 7.5% decrease in the stock market's subsequent 12-month return. I reached similar results when correlating the total market value of each year's IPOs and the stock market's subsequent 10-year return, as you can see in the chart above.

Given the megacap IPOs this year so far, GMO's finding is extremely bearish. Collectively, SpaceX's IPO and the anticipated size of OpenAI's and Anthropic's IPOs represent a roughly 5% increase in the U.S. stock market's total market value. The implication: a decline in the broad stock market of close to 40% over the next 12 months.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert

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06-22-26 1818ET