The IPO market is starting to thaw after a 2-year freeze, signaling more upside ahead for the stock market

• The IPO market is finally beginning to warm up after a two-year freeze.
• Reddit, Astera Labs, and Arm Holdings are recent IPOs that have seen successful trading debuts.
• LPL Financial says thriving IPO market signals a broader risk-on environment that should push up stock prices.

The IPO market is finally starting to show some signs of life following a two-year freeze of companies going public.

That suggests to LPL strategists Dr. Quincy Krosby and Jeffrey Buchbinder that the stock market has more room for upside as a risk-on environment begins to pick up steam.

"Should markets continue to pass this 'test' of digesting more equity issuance, as it has so far this year, it may argue for further stock market gains ahead," the strategists said in a note on Monday.

The IPO market got an encouraging sign in September when ARM Holdings went public, creating some excitement as it leaned in to its exposure to artificial intelligence. Reddit and Astera Labs went public last month and have seen solid demand for their stock as both remain above their initial IPO price.

But there's still a lot of work to be done if the IPO market is going to start flashing bright green lights to private companies looking to go public.

Just 171 companies went public in 2023, raising $26.2 billion in capital. While an improvement over 2023, that pales in comparison to 2021, when about 1,000 companies went public and raised nearly $339 billion in capital.

The numbers are starting to pick up in 2024, with 14 companies going public so far this year.

"The number of IPOs has risen steadily this year in recognition of the improved environment for new issues to come to market," Krosby and Buchbinder said.

It's not just companies going public that signals an open IPO market and a risk-on environment, but solid performance for the stocks in the months after the companies go public, according to the note.

And that's exactly what's starting to happen.

The Renaissance IPO ETF, which owns companies that have recently gone public, is starting to print some solid gains after it declined 69% from its 2021 peak amid the 2022 bear market. But since its bottom, the IPO ETF is up 70% and is up 42% over the past year.

"The recent increase in IPO activity and generally positive price performance provides a favorable reading for this risk barometer," the strategists said.

The return of the IPO market coincides with a stock market that has surged to record highs this year, with the S&P 500 hitting 21 new closing record highs in the first three months of the year. The strong rally has led some market strategists to grow worried about a stock market bubble and imminent crash.

But Krosby and Buchbinder argue that the current state of the IPO market suggests that there is plenty of more upside ahead for stocks and that bubble territory is nowhere in sight.

"For those worrying that successful IPOs might be a sign of a potential market top, consider the number of offerings is nowhere near SPAC-boom levels of 2021 and remains below pre-pandemic levels. Finally, aggregate recent performance of newly issued securities reveals relatively benign price performance rather than evidence of an overheating market," the strategists concluded.