US capital markets are seeing the much-anticipated pullback from the historic bull market run of the last decade. Q1’s volatility continued into Q2 as investors sold securities amid persistent inflation, rising interest rates and geopolitical instability. Disruptions in some supply chains appear to be resolving, with select consumer inventories recovering. However, high global energy prices continue to ripple through the economy. Stock markets in the US dipped into bear market territory, with the S&P 500 down 13.7% for the second quarter and down 17.9% for the year. However, seasoned investors may view this retreat as a healthy valuation reset.
Real GDP growth for the first quarter declined at a 1.4% seasonally adjusted annual rate, dragged down by inventories, government spending and a widening trade deficit. US growth is expected to rebound in the second quarter. Consumer spending has slowed but remains resilient, fueled by a tight labor market and strong household balance sheets, even after accounting for recent asset price declines. However, with tail risks rising and higher inflation continuing to erode consumer purchasing power, US growth is expected to slow sharply in coming months. The risk of a recession is more elevated now than it usually is at this point in the economic cycle. While a recession is not our baseline expectation, the near-term outlook continues to call for heightened vigilance. Our baseline projection is for real GDP growth to slow to below 2% in 2022, a sharp deceleration from 5.7% in 2021.
Given our view that a recession is not inevitable, it is possible that valuation resets could provide a floor for investors seeking value-based returns, and we could see stock market indices grow. A broad-based recession could technically still take place in a growing stock market, which could open up capital markets later this year and into next year.
The short-term outlook for debt remains tempered, as most borrowers secured funding ahead of the Fed’s quantitative tightening program. Looking further ahead, mergers and acquisitions (M&A) and leveraged buyout (LBO) activity will support capital raising.
Capital raising themes that are likely to impact US markets include the increasing influence of private capital, such as private equity and private debt, with even more private capital piling up if special purpose acquisition company (SPAC) equity is redeemed. Energy prices are likely to remain elevated due to a number of factors, including the Russia-Ukraine conflict. Environmental, social and governance (ESG) remains a major theme for capital markets, with investor demand and regulatory scrutiny increasing the urgency to adopt ESG initiatives. Looking forward, for capital markets to reopen, we would look to see a return to commodity price stability, positive earnings reports and reductions in volatility. Other factors to watch include onshoring of the supply chain, positive bumps to consumer sentiment and increased visibility into the Fed’s upcoming policy.
“Recent IPO pullbacks are reemphasizing investors’ focus on profitability.”
Please note: IPOs with deal values of less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded from this narrative. Data as of 6/24/22.
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West Coast Capital Markets Advisory Leader, PwC US
Debt Capital Markets Advisory Leader, PwC US
IPO Services Co-Leader, PwC US