Key Takeaways
A Bank of America strategist warns the impending SpaceX initial public offering could push market concentration past historic bubble levels, creating systemic risk for investors as euphoria around the deal reaches a fever pitch.
"Strong price trends, retail fervor, low volatility... the scent of a bubble is thick in the air," Michael Hartnett, chief investment strategist at Bank of America, wrote in a recent report. "Add super-IPOs to the AI giants, and market concentration will easily surpass the ~48% levels of the Roaring '20s, Nifty '50s, Japan '80s, and TMT '90s bubbles."
The warning comes as SpaceX, which filed its S-1 this week, is reportedly targeting a $75 billion offering that could value the company near $2 trillion. This would be more than triple the size of the current US record holder, Alibaba's $21.8 billion IPO in 2014. The tech sector's weight in the S&P 500 already exceeds 44 percent, and Hartnett's analysis shows the inclusion of mega-IPOs like SpaceX and a potential future listing for OpenAI would push that concentration past the peak of any major bubble in the last century.
For investors, the risk is magnified by the fact that new rules will likely allow SpaceX's inclusion in major benchmarks like the S&P 500 within weeks of its debut. This forces index funds, a staple of American retirement accounts, to buy the shares at any price. While some mega-IPOs like Visa have generated massive returns—up about 2,900% since its 2008 offering—others have faltered. Rivian, which raised $11.9 billion in 2021, has seen its shares plummet roughly 82% from its IPO price amid production shortfalls and softening EV demand.
The SpaceX IPO is being hailed by some as a "golden moment" for the space industry, with analysts at Wedbush comparing its potential to define a new sector to how Tesla defined the electric vehicle market. This anticipation has already ignited a rally in space-related stocks, with a Bank of America basket of space-themed companies up 42 percent this year, outpacing both the S&P 500 and Nasdaq 100.
However, the comparison to Tesla also serves as a cautionary tale. While Tesla grew to become a tech behemoth, many other EV companies that rode its wave have struggled. Rivian's 82% collapse from its peak and Xpeng's 78% drop from its 2020 high illustrate the danger for smaller companies in a sector dominated by one giant. "The market will look at each company one by one," said Eric Diton, President of The Wealth Alliance. "My first question is, how do you compete with Musk and SpaceX? Do you have a competitive advantage?"
Hartnett remains cautious, noting that a sharp rise in bond yields has historically been the pin that pricks market bubbles. With investor sentiment at "maximum bullish" levels, he suggests taking profits, but concedes that "no one will reduce their long positions before the historic IPO arrives."
This article is for informational purposes only and does not constitute investment advice.
