As you may have noticed, equities roller coastered over the past 10 days or so as the calendar flipped to June. This market pressure pushed the S&P 500 down 4.1% month-to-date (as of this writing).
But at its most basic level, this shouldn’t be entirely surprising considering the parabolic gains registered in April and May. After such moves, things can get volatile (as we mentioned), and it’s reasonable to expect the market to take a breather.
The unique nature of this market is perhaps best represented visually. As you can see, the price returns vary this year during different time periods:
The historical gains experienced in April and May contributed most of the year-to-date gain so far. Since markets ebb and flow, the current reset we’re experiencing almost seems required.
Most importantly, even with the seemingly weak macro index, under the surface we can see that June volatility hasn’t resulted in massive equity selling:
That being the case, we at Cornerstone believe there are a few short-term factors contributing to the market turmoil in early June.
SpaceX
One is the SpaceX initial public offering. Leading up to last Friday, some investors thought the IPO would set the top for the market given its sheer size, especially considering the amount of cash institutional investors had to raise.
Other IPOs
This belief is further exemplified due to the massive additional public equity capital raises to come in the months ahead, specifically from Google, Anthropic, and OpenAI. Short-term volatility to raise cash for those IPOs makes sense.
Profits
Finally, there's been clear and evident profit taking and consolidation within semiconductors and memory stocks after historically parabolic moves in April and May.
Flushing all these factors out further, in the near term we believe the pricing of the SpaceX IPO was putting downside pressure on U.S. equities overall. Remember, two days before the IPO, it was reported to be oversubscribed by four times.
If accurate, that alone indicates a demand of around $300 billion in pre-IPO market orders. For perspective, that means institutions placing an order for $100 million in SpaceX shares may only receive around $12-25 million in shares. So, they have to raise additional cash to prepare for the stock to trade significantly higher than its $135 list price over the first handful of trading days.
This would mean the institution would need to set aside significantly more than $100 million to ensure it’s able to buy the necessary shares for their funds and clients as those additional shares will be more expensive.
But these “big money” investors will have no choice. What do we mean by that?
On top of the significant oversubscription, SpaceX will be added to both the Nasdaq 100 and Russell 1000 indices soon after the IPO. Specifically, SpaceX will be added to the Nasdaq 100 index just 15 days after the IPO and to the Russell 1000 during its upcoming reconstitution on June 26th.
Therefore, the past couple of weeks’ underlying data clearly indicates that institutional fund managers are shedding big equity winners to raise cash to fund their upcoming IPO allocations and subsequent aftermarket buying. There are over 1,400 funds that track the Nasdaq 100 and Russell 1000. Every single one will need to buy SpaceX to meet their benchmarks. The amount of cash needed for this could easily exceed the IPO subscription requests.
For instance, in the ever-popular Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100, SpaceX’s weight could be between 9.3% and 9.5% once the insider lockup period expires.
While in the near term these cash needs are triggering early summer volatility, we believe that if the SpaceX IPO trades well, it will be viewed as a positive overall catalyst for equities.
That’s because SpaceX and the other companies going public this summer will fuel the abilities of these massive companies to keep building out their AI ecosystems and infrastructure.
This capital being raised is directly earmarked to be spent on physical AI infrastructure and will continue to benefit those companies strategically positioned to provide the products and services necessary to build each of the necessary layers:
This graphic may look familiar. We included it a blog post earlier this year to help visually explain the AI investment strategy around HALO (heavy asset, low obsolescence) companies that provide the necessary "picks, shovels, and tents" that companies raising capital this summer need to buy.
The cash being raised in the short term is disruptive to the markets. But we think these IPOs and equity capital raises will be intermediate- and long-term positives overall.
Turning to exchange-traded fund data for an under-the-surface look, we see further evidence of specific institutional selling to raise cash. It happened in three different ETF areas that rarely occur together. We think this further indicates the massive scale and scope of the necessary cash for the upcoming months.
First, there were multiple days of outflows in short duration Treasury ETFs:
This is dry powder cash leaving its hiding place.
Next, there was a further acceleration of the entire cryptocurrency ETF complex being dumped:
This is an important development because crypto and risk equities have long moved together as a risk-on trade. But now institutions are favoring one over the other.
Lastly, there was continued bleeding in many defensive ETFs. Here’s a popular volatility hedge ETF being sold:
Since the majority of ETF outflows are from these three categories, it's an indication of a coordinated exodus from places capital typically hides when it wants to wait. This is dry powder being accumulated for deployment across thematic, risk-on areas:
And IPOs:
Once this fundamental rotation is complete, the market will benefit. In the near term, it’s important to acknowledge additional drivers of increased volatility:
1.Right or wrong, equity markets continue to be concerned over inflation data.
So we’ll most likely see new Federal Reserve Chair Kevin Warsh giving varying views on inflation measurements and overall policy guidance. Perhaps more concerning is May’s hot producer price index report, which came in at 1.1% – well above the consensus 0.7% expectation.
2. Continued concern over the seemingly ever-changing and adjusted employment data that nobody seems to be able to agree on whether it is good or bad news.
3. The almost assuredly negative effect on the markets as we get closer to the uncertainties surrounding the 2026 midterm elections.
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