Wall Street banks reap windfall from stock and debt sales
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The AI-driven dash to U.S. capital markets to sell stocks and bonds from companies like Alphabet, Nvidia and SpaceX is creating an echo boom on Wall Street.
Why it matters: While the boom is making it rain, at least in the short term, for investment bankers, the deluge of equity and debt issuance has emerged as a concern for investors.
The latest: Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America all reported gangbusters second-quarter revenue from underwriting — the fees collected from corporations for the banks' help bringing stock and bond sales to market — goosing overall results and sending the shares of Goldman and JPMorgan to record highs.
What they're saying: More deals are coming.
- "The pipeline is actually quite robust," JPMorgan chief financial officer Jeremy Barnum said on the bank's post-earnings conference call, adding that "it feels a little bit as if the high-profile nature of the activity this quarter and just the generally robust environment is itself begetting more activity."
- David Solomon, CEO of Goldman Sachs, said: "What we see in our pipelines, we expect this flywheel of activity to continue. Even with very strong investment banking revenues this quarter, our backlog increased to its highest level in five years and its second-highest level on record."
Yes, but: That's all well and good for the bankers, and probably reassuring to the AI labs, hyperscalers and neoclouds that are now relying on the kindness of strangers in the market to fund their AI ambitions.
- But what about the investors?
The big picture: Obviously, follow-on share offerings are dilutive to those who already own the stock. More broadly, however, research has shown the surging issuance of equity to be something of an indicator of the later stages of market booms.
- This makes sense. Executives see fairly rich valuations and want to take advantage of them by selling stocks and bonds at high prices.
- As a result, stock issuance tends to cluster around market peaks.
Flashback: Some academics have pointed to the surge in stock issuance in the late 1990s and early 2000s — which hit the market with a delay as lockup restrictions on insiders expired — as a key contributor to the dot-com crash.
What we're watching: How the latest mega-offerings are trading and how announcements of plans to raise more capital are greeted. Either could be a tell about whether enthusiasm for the AI boom is starting to ebb. The latest information is something of a mixed bag:
- ADRs of Korean chipmaker SK Hynix have swung wildly since their U.S. trading debut on Friday.
- Shares of Elon Musk's SpaceX have been sliding back toward their IPO price of $135 a pop.
