Key facts
- GMO warns of a significant increase in new stock supply over the next several years.
- Factors contributing to the supply increase include SpaceX's insider share sales, upcoming mega-IPOs, and secondary issuances.
- GMO estimates US equity supply could grow by 5% annually, contrasting with historical annual shrinkage of 1%.
- The firm suggests this could lead to a 20% hit on returns over the next year and a half.
- GMO believes the increased supply could pop the AI bubble.
- New public companies raised over $137 billion in the first half of the year, a 400% increase year-over-year.
GMO, the asset management firm co-founded by Jeremy Grantham, is sounding the alarm about a potential "deluge" of new stock supply that could weigh on market performance for years to come. In a recent note to clients, the firm highlighted that factors such as SpaceX unlocking insider shares, anticipated mega-IPOs from companies like OpenAI and Anthropic, and ongoing secondary issuances are poised to significantly increase the amount of equity available to investors.
GMO estimates that US equity supply could grow by approximately 5% annually, a dramatic shift from the historical trend of equity supply shrinking by 1% each year. This influx of new shares, coupled with passive and benchmark-aware market structures that may limit absorption capacity, could lead to a meaningful dampening effect on future returns. The firm suggested this could translate to a roughly 20% hit relative to normal returns over the next year and a half, if historical patterns hold true.
Furthermore, GMO posits that this surge in equity supply could act as a catalyst for bursting the current AI bubble, noting that markets have become increasingly sensitive to changes in equity supply. The firm's co-head of asset allocation, Ben Inker, and head of asset allocation research, John Pease, wrote that in such a sensitive market, prices could turn before the broader market fully recognizes the shift.
Recent market activity supports this concern, with a record-breaking year for IPOs. In the first half of the year, new public companies raised over $137 billion, a nearly 400% increase year-over-year, according to the Securities and Exchange Commission. Analysts are concerned that investors, who already have global equity allocations near a five-year high according to Bank of America surveys, may need to sell existing holdings to make room for these new mega-cap tech stocks, potentially leading to broader market weakness.