A couple of weeks ago, we looked at how IPOs performed in 2023 (activity was “muted,” and returns were historically weak). Despite that, at the end of that piece, we were optimistic about a stronger year for IPOs in 2024. One reason why is the subject of today’s blog: our new Nasdaq IPO Pulse Index.
IPO activity rises and falls in cycles. You might think it is affected by things like interest rates, the economy, or high stock valuations. Today, we present a new index that shows what factors really drive changes in the IPO market.
Nasdaq’s new IPO Pulse is a data-driven leading index of IPO activity
The Nasdaq IPO Pulse shows the trend in IPOs before the actual IPO data changes.
Nasdaq’s IPO Pulse has shown in back-testing to consistently lead directional shifts in IPO activity (green bars in Chart 1) going back to the early 1990s. On average, the index leads turns in IPO activity by about five months.
We show the index as the blue line in Chart 1, advanced five months. The data show that the IPO Pulse has been in an upturn since October 2022 – anticipating the December 2022 low in IPO activity. It also recently reached a two-year high in December 2023. This suggests that IPO activity, which has already nearly tripled from its recent low, should remain in an uptrend over the next half-year.
Chart 1: The IPO Pulse (advanced five months) is forecasting a recovery in the IPO market in 2024
The IPO Pulse Index combines six fundamental drivers of IPO activity
In building the index, we tested more than 50 different series. We settled on six leading indicators, which theoretically should and empirically do lead shifts in IPO activity over the last two or more decades, with few false alarms or missed turns.
The data we include captures a broad range of factors that should also intuitively contribute to the decision for a company to IPO. We found the following data worked well:
- Interest rates
- Market volatility
- Recent returns
- Investor sentiment
- Some of Nasdaq’s proprietary IPO data
We then score and combine these indicators into an index. You can learn more about the index construction and the longer-term performance in our white paper.
Our new IPO Pulse suggests 2024 will continue to see an uptick in IPO activity
Through a data-driven approach, our new IPO Pulse helps reveal trends before the IPO data changes.
Currently, the IPO Pulse is in a clear upswing, having turned up in October 2022 and increasing steadily at least through December 2023.
With the IPO Pulse at a fresh two-year high, IPO activity should remain on an upswing in the coming months. Improving earnings, a market rally, and falling interest rates all help give 2024 more attractive conditions for companies to IPO.
Michael Normyle, U.S. Economist at Nasdaq, contributed to this article.
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