Wall Street's Major Trend Set to Make a Surprising Reversal by 2024
Wall Street's dealmaking and IPOs have plummeted to a decade-low, hindering growth However, 2024 holds promise for a reversal, as the Dow hits consecutive record highs, sparking hope for a prosperous holiday season Protect your whiskey and brace for a brighter future
According to EY data, 2023 saw a significant decline in global IPO volumes by 8% and a 33% drop in proceeds compared to the previous year, making it one of the worst years for mergers and acquisitions in about a decade on Wall Street. Additionally, very few companies made their stock market debuts during this time.
In the meantime, global deal values are expected to dip below $3 trillion this year, the first time since 2013, according to Bloomberg data. This could potentially result in smaller Wall Street bonuses, and also has broader implications for Main Street.
IPOs and M&A transactions facilitate the transfer of funds from well-established corporations to innovative and expanding companies, contributing to job creation, economic growth, and technological progress.
However, according to some experts, the outlook for dealmaking appears more promising in 2024.
The stock market has been robust this year and economic data has shown resilience. However, dealmaking has not experienced the same positive impact. Rather, high interest rates, increasing geopolitical tensions, antitrust scrutiny, and fears of a recession have continued to hinder dealmaking.
Analysts at the Boston Consulting Group wrote in their year-end analysis that M&A dealmakers have faced their most enduring challenges since the 2008-2009 financial crisis. Additionally, many companies that went public this year experienced a decrease in share prices, which has deterred others from following suit.
Instacarts September IPO launched at $42 per share, boosting the tech-enabled grocery-delivery company's market valuation to over $11 billion. The stock closed at $24.61 on Tuesday, with a market cap of about $6.9 billion. Klaviyo, a software vendor, priced its stock at $30 per share in September, and it closed at $27.34 on Tuesday.
Analysts at EY wrote that after a period of low listings, IPO issuers and investors were eager to ride the market upswing. However, this enthusiasm waned in September when high-profile IPOs struggled, affecting market sentiment.
Experts suggest that 2024 may bring positive developments to the dealmaking market.
Private equity firms currently have a historic $2.6 trillion in "dry powder" available for investment, as reported by S&P Global Market Intelligence and Preqin data. This surplus of capital indicates a significant potential for M&A activity.
Additionally, pricing discrepancies between sellers and buyers have hindered dealmaking this year, with BCG citing the recent US Steel deal as an example (Japans Nippon Steel is paying a 142% premium for the US company).
However, BCG predicts that these differences will likely narrow in 2024 as interest rates decrease and both markets and the economy become more stable. This reduction in volatility is expected to lead to increased dealmaking. According to the EY report, companies are particularly focused on artificial intelligence and are expected to pursue deals to acquire this new technology.
Analysts wrote that AI has provided companies with the chance to transform productivity, broaden their range of products, and venture into new markets. The increasing demand for these technologies has also been a driving factor for the performance of tech stocks, which have outperformed the S&P 500 by approximately 10% since the beginning of 2022. Additionally, the volume and value of Tech M&A saw growth in the last quarter, surpassing the figures from the first half of the year.
The M&A plans in the energy sector have experienced significant growth this year. US energy companies announced over $332 billion in transactions valued at $100 million and above in 2023, which is a substantial increase compared to 2022, according to EY.
Since the beginning of 2022, energy stocks have surpassed the S&P 500 by approximately 54%. However, this week, the FTC and DOJ revealed the finalization of 11 new merger guidelines in the US. These guidelines mark the most significant changes in M&A review by US regulators in 40 years, as stated by Mitch Berlin, Vice Chair at EY.
The executive offices and boards will need to work harder to obtain regulatory approval and should start preparing for the lower thresholds that will indicate anticompetitive effects and increased information flow," he stated. Berlin predicts that these changes could extend merger timelines by an extra two to three months.
The Dow just reached its fifth record high in a row
The Dow jumped another 250 points to about 37,558 on Tuesday, closing out its ninth winning day and fifth consecutive record high.
The S&P 500 closed at 4,768, only 0.6% below its previous record of 4,796 set in January 2022. Stocks have seen positive momentum in recent weeks as the year-end rally persists and Wall Street is buoyed by the Federal Reserve's decision to maintain steady interest rates following two years of aggressive hikes, with indications of three rate cuts in 2024.
Investor optimism has been boosted by the Feds dovish pivot and positive economic reports in the lead-up to the end of the year. However, there are concerns that some of these hopeful projections may not align with reality.
The Fed has indicated the potential for three rate cuts in 2024, but the market is anticipating six. According to the CME FedWatch tool, investors are now expecting a total of six rate cuts next year. This disparity in expectations could result in a market downturn. Atlanta Federal Reserve Bank President Raphael Bostic stated on Tuesday that there is no immediate need for the central bank to decrease interest rates.
"I believe that inflation will decrease gradually over the next six months, so there is no rush for us to shift our restrictive stance," he stated during a roundtable discussion in Atlanta. Chicago Fed President Austan Goolsbee expressed his confusion about the market's enthusiastic response to the central bank's decision last Wednesday during an interview with CNBC on Monday.
Goolsbee stated on CNBC's Squawk Box, "It's not about what you or the chair says. It's about what people hear and what they want to hear. I was a bit confused - was the market just assuming, 'Here's what we want them to be saying'?"
Meanwhile, Treasuries continued to indicate that investors anticipate Fed cuts in the near future. The yield on the 10-year US Treasury note dropped again on Tuesday, reaching its lowest level since July after falling below 4% on Thursday.
Your whiskey is safe for the holidays
Christmas came early for US whiskey makers.
Before, it was reported by Before the Bell that the EU, which is the primary export market for American whiskey, was planning to implement a 50% tariff on imports of the popular liquor in the coming year. Advocates for the spirit industry expressed concern that this could have a significantly negative impact on the $5.1 billion whiskey industry and the overall economy of the United States.
But the crisis has been averted. For now, at least.
The US and EU have agreed to extend the suspension of EU tariffs on American whiskey until March 31, 2025.
This is just the beginning of the change, not a permanent one. Chris Swonger, president and CEO of the Distilled Spirits Council, stated on Tuesday that the Biden administration should keep working towards completely eliminating harmful tariffs in disputes that don't involve the spirits industry. He also emphasized that as long as the threat of these tariffs coming back remains, it will hold back the growth of American Whiskey exports in their most crucial global market.
