Happy hump day everyone! Politics and presidents aside, earnings are the big story this week.

Tesla, for one, reported declining profits for the second consecutive quarter on Tuesday. More on that below.

First, we are going to unpack how the stock market impacts the IPO market — and whether the former can help thaw the latter.

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Private markets aren’t thawing just yet

The buzzy cloud firm Wiz walked away from a $23 billion acquisition deal with Google on Monday, with executives pivoting their focus to an initial public offering.

Wiz acted counter to a pattern that’s stuck since the pandemic. The last two years have been far kinder to big public companies than small private ones. 

While S&P 500 shareholders have netted double-digit returns through the Fed’s rate-hiking cycle, most early-stage investors have been sidelined, waiting for their bets to go public in a more receptive market.

The landscape for IPOs has frozen over since booming in 2021. 

Some industry observers, however, see the July small-cap rally as reason for optimism. 

Craig Coben, former head of equity capital markets at Bank of America, told me the July upswing for the Russell 2000 will open up more opportunities for early-stage companies, but more time and more favorable regulation is needed for a lasting IPO rebound.

“The small-cap rally can help ameliorate but not resolve,” Coben told me, adding that the momentum does look “incrementally” helpful for future IPOs. 

In the third quarter of 2021, 96 companies made the jump into public markets.

That collapsed by more than 80% in early 2022, according to data from PitchBook shared with Opening Bell Daily.

The IPO pipeline has remained stagnant since the Fed started raising interest rates in March of that year.

Remember, the rotation from Big Tech into small-cap stocks marks a bet on coming rate cuts. Traders expect a guaranteed move lower in September, which makes smaller companies more attractive investments. 

A report from EY showed the number of US IPOs has jumped 30 percent in the first half of 2024 compared to the same stretch a year ago.

Low volatility and stronger valuations, analysts say, have made the market more favorable.

Phil Haslett, the founder of EquityZen, a platform that offers investors access to pre-IPO companies, told me he doesn’t anticipate much change to the near-term outlook for private markets.

“If anything, I think the small-cap rally might ignite some M&A between large-caps and small-caps,” Haslett said. “Big rallies like these can shine a light on under-the-radar small-caps.”

It’s worth noting that an increase in total IPOs or deal-making, though, is not the same as a return to meteoric funding levels. 

In 2021, single-month exit values soared as high as $176 billion, according to PitchBook. There’s only been one month since the start of last year in which funding reached 5 percent of that figure.

Meanwhile, investors’ latest rebalance appears to be a step back from growth names and toward value stocks — a trend that does not point to a resurgent IPO market.

Companies that typically IPO tend to be growth-oriented. 

“The recovery of small caps is good but it’s still early stages,” Coben said. “I still think the blockages you have are going to take a little while to come undone.”

Thoughts or feedback? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

Elsewhere:

🚘️ Tesla’s profit fell 45% in Q2. The stock tumbled after hours as the EV maker saw weaker demand and more competition. Net income hit $1.5 billion for the quarter, and deliveries also declined. Tesla’s closely-watched operating margin was 6.3%, lower than the 9.6% seen one year ago. (Yahoo Finance)

⭐️ Alphabet stock ticked up. The Google parent hit expectations for earnings on its top and bottom lines, and it reached $1 billion operating profits for the first time ever. One notable detail was that YouTube ad revenue fell short at $8.66 billion, below the forecast for $8.95 billion. (CNBC)

💳️ Visa shares fell more than 4% after hours. The company missed expectations as it reported slowing payment-volume growth for the quarter, though it did see profits climb. Competitor American Express also missed expectations. (Reuters)

🪙 Ether ETFs debuted on Tuesday. And they were met with huge fanfare. More than $1 billion worth of shares changed hands across nine different ETFs. That’s less than the $4.6 billion seen with the bitcoin ETFs in January, but a robust launch nonetheless. BlackRock’s iShares Ethereum Trust ETF saw the biggest trading volume at $248 million. (Bloomberg)

Rapid-fire:

• Berkshire Hathaway sold $1.5 billion in Bank of America stock (Barron’s)

• Spotify stock soared as much as 14% on Tuesday after stellar earnings and outlook (Business Insider)

• President Biden is set to speak this afternoon about his decision to drop from the election (Bloomberg)

• Analysts expect Chipotle to report strong earnings after Wednesday’s trading session (Yahoo Finance)

• While US home prices hit a record in June, inventory of existing homes hit the highest level since early on in the pandemic (Housing Wire)

Last thing:

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