In 2021, equity and debt markets showed an outstanding recovery from 2020, with the S&P 500 closing at record highs throughout the year. The first half of the year showed a substantial return of investor faith after the passage of the American Rescue Plan Act and an unprecedented first quarter during which 390 IPOs raised $126 billion, partly driven by a wave of special purpose acquisition company (SPAC) IPOs.
A spike in inflation in May 2021 caused the market to drop more than 4% over a three-day period, signaling investor anxiety that persisted all year as inflation ticked higher in October and November. Investors have shown concern over economic recovery in light of the Delta and Omicron variants of COVID-19, as well as the impact of rising costs on corporate earnings and fears that the Fed would respond to inflationary pressure by increasing interest rates and accelerating its tapering program.
We expect continued GDP growth over the next few quarters and believe capital markets will remain resilient in the near future as the Fed closely manages the recovery and inflation concerns.
The early part of 2021 saw continued support for a broader recovery via economic stimulus and accommodative policy from the Fed. Early disappointments in macroeconomic indicators have been reversed by notable improvements in consumer confidence and 50-year record low unemployment claims.
Investor pessimism with respect to Federal Open Market Committee (FOMC) interest rate revisions and asset purchasing programs was overshadowed by an overwhelmingly positive earnings season. Through the first three quarters of the year, 85% of the S&P 500 beat their EPS estimates. In addition, a growing number of companies are accessing public markets through IPOs and SPACs aided by a significant influx of first-time retail investor participation. All of these factors have led to the extension of the V-shaped recovery, leading major indices to close at all-time highs, with the S&P 500 returning more than 25% for the year.
US debt markets continued to set records in 2021 with the help of historically favorable yields and a record-setting M&A year, despite potential headwinds such as economic growth concerns and inflationary pressures. Despite concerns about the impact the Omicron variant could have on the economy, the Fed confirmed its recent stance to accelerate its tapering program in response to inflation, which has recently reached its highest level since 1982. Based on strong market reactions to FOMC policy throughout the year, the Fed’s tapering is expected to have a marked effect on asset prices in debt and equity markets.
US debt markets enjoyed another record-setting year in 2021. Both the high-yield (HY) bond and leveraged-loan (LL) markets set all-time issuance records and combined to shatter 2017’s leveraged-finance record. The markets were fueled by the government’s fiscal stimulus, historically low interest rates, opportunistic refinancings and a boom in M&A and buyout deals. It was the second straight year the HY bond market set an annual record for proceeds raised. The LL market rebounded from a nine-year low in 2020 to blow out records as investors looked to floating-rate debt and borrowers funded M&A and buyouts.
Refinancing activity drove investment-grade (IG) bond issuance.
M&A and refinancing contributed to a second-straight record-setting year.
PE dealmaking created leveraged-loan issuance record.
Issuers seized on historically low yields ahead of potential rate hikes.
We expect strong household fundamentals and gradually easing supply constraints to further support economic activity through this year. The risks, however, are weighted to the downside. Labor and intermediary input shortages, inflation overshoot and the Omicron variant could continue to weigh on growth in the near term. While we expect GDP growth to remain above trend over the next few quarters, the underlying pace of growth likely will begin to slow by mid-2022 as fiscal stimulus diminishes and some of the pulled-ahead demand fades. Our baseline expectation is for real GDP growth to top 5.5% in 2021, but then moderate to about 4% in 2022.
We anticipate IPOs could potentially continue their pace of issuance into 2022 as ever-increasing piles of cash on the sidelines, including $134 billion in SPACs, need to be invested. Also, the IPO pipeline is stuffed with private equity and VC-backed companies with significant track records and market presence, which makes them good IPO candidates. However, external pandemic or geopolitical shocks to the economy could pose challenges to investors’ appetites for new listings. With nearly 570 SPACs still looking for deals, it is likely that SPAC issuance will slow down. Despite concerns about new COVID-19 variants, optimism remains high that vaccines and other mitigation strategies can prevent widespread lockdowns, keeping equity markets steady and maintaining the environment many prospective companies seek when going public.
The market will continue to debate the Fed’s actions in 2022 as inflation and the potential for new variants pose greater risks to the economy. The spike in inflation and the question of its longevity continue to add uncertainty around monetary policy. Pending any unexpected action from the Fed, issuers will likely continue to strengthen their balance sheets at historically attractive rates. Additionally, M&A and LBO activities are expected to continue their pace and drive the market forward, as buyers compete for assets and corporates look for synergies and focus on their core operations.
The broader capital markets enjoyed an excellent 2021 and look strong going into 2022 despite a recent pullback largely resulting from the Omicron variant. Key concerns for continued economic recovery include the effectiveness of current vaccines against new variants, as well as quarantines and other geopolitical factors that are disruptive to economic recovery and supply chains. The market appears to have priced in these concerns, and investor sentiment remains high going into 2022, making US markets poised to remain positive.
Please note: IPOs with deal values of less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, and IPOs pricing on OTC Bulletin Board or OTC Pink Sheets are excluded from this narrative. Venture capital data is for US headquartered companies. Data from SEC filings and third-party databases are as of December 31, 2021.
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Partner, IPO Services Co-Leader, PwC US
IPO Services Co-Leader, PwC US
Capital Markets Advisory Leader, PwC US
Capital Markets Research Leader, Deals, PwC US