Tough times on the range bode ill for market digesting war, inflation, massive IPOs

(Originally published June 8 in “What in the World“) Oil prices climbed as Israel resumed strikes against Iran.

Israel launched missiles against roughly 15 targets inside Iran after Iran launched a wave of its own ballistic missiles into Israel. Iran’s attack was meant to retaliate against fresh Israeli strikes on Beirut, which were in turn meant to retaliate against attacks by the Iran-backed Hezbollah militia against Israel. Israel said it had managed to intercept the Iranian missiles.

The widening conflict renewed fears that oil prices would rise higher, exacerbating inflation and prompting the U.S. Federal Reserve to raise interest rates. That would raise financing costs for the companies borrowing heavily to invest in AI that have dominated the market’s recent record-setting rally. Brent crude prices climbed 3% back above $96 a barrel and Asia’s tech-heavy markets on Monday continued Friday’s tech-led rout in New York.

The Fed has been cutting its benchmark interest rate gradually since September 2024 but has defied Trump’s calls for further cuts and instead held its target rate steady so far this year amid persistent inflation. U.S. economic growth, meanwhile, has accelerated to roughly 2.5% from 2% a year ago, yet Trump on Sunday reiterated his demand for a rate cut.

Strong job growth data released last Friday also sparked concerns that the Fed might keep rates steady or even raise them. The U.S. Labor Dept. said 172,000 jobs had been created in May, more than expected. The market is still betting the Fed will hold rates steady until at least December. That will offer little relief to household borrowers. And even as jobs grow, wages aren’t keeping up with rising prices. While consumer prices are rising at 3.8% a year, average hourly earnings have dropped to 3.4%.

Perhaps the biggest challenge facing the market, however, is how it will absorb massive new shares sales by Big Tech. Anthropic, OpenAI, and SpaceX are about to conduct the largest-ever initial public offerings. SpaceX aims to raise a record $75 billion from its IPO, with shares expected to start trading Friday.

Later this year, Anthropic is expected to sell $1 trillion worth of shares and OpenAI another $60 billion worth when they conduct their IPOs. And Google’s parent Alphabet, whose shares are already publicly traded, has announced plans to sell another $85 billion of shares this year, with roughly $40 billion of that sold last week.

The challenge for investors is that these companies’ market capitalizations will immediately dominate benchmark indexes. That makes owning their shares virtually mandatory for fund managers overseeing index-linked funds. Raising the $1.185 trillion in cash to buy all this new stock could also force investors to sell existing shares in other companies, putting downward pressure on the market.

Put another way, the glut of new equity coming to market is creating a massive oversupply of shares that lowers the overall value of stock and, by placing massive new demands for cash on investors, raises the price of free cash, i.e. real interest rates. That’s bad for the market and for economic growth. And those higher real interest rates are on top of the likelihood that rising prices for fuel and other goods push up inflation and prevent the Fed from offsetting the cash crunch by lowering its benchmark interest rate.

Another threat may be coming from America’s grasslands. U.S. cattle ranchers, already contending with severe drought reducing pasture, are now battling a return of New World screwworm to herds for the first time since the 1960s. U.S. prices for ground beef have climbed by almost a third in the past year and the U.S. Agriculture Dept. last month predicted that beef prices would climb by more than 12% this year.