In the aftermath of the COVID-19 pandemic, the landscape of American equity markets has undergone a significant transformation. Investors, once buoyed by optimism and a flood of initial public offerings (IPOs), have retreated into a more cautious stance. As economist Peter Earle from the American Institute for Economic Research aptly notes, “Post-COVID, investors have become notably more risk averse.” This shift is reflected in a marked decline in the number of new companies entering the market, a trend that has heightened concentration in established large-cap companies, particularly the so-called “magnificent seven”: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Together, these tech giants command about one-third of the S&P 500’s total market capitalization and a staggering 43 percent of the NASDAQ 100.
Despite a generally strong stock market performance since 2022, the IPO market has stagnated, falling significantly short of its historical annual average of $50 billion in capital raised. According to a March report from Russell Investments, new issuance has been decidedly anemic, raising questions about the underlying economic conditions and investor sentiment. The reluctance to invest in smaller, less established firms has left many potential IPO candidates sidelined, essentially limiting opportunities for retail investors to diversify their portfolios away from the dominance of large-cap stocks.
At the core of this IPO drought lies a complex web of economic factors that have coalesced since the pandemic. Earle highlights “massive uncertainty, macroeconomic headwinds, tighter financial conditions, and valuation concerns” as key contributors to this trend. The rise in interest rates, aimed at curbing inflation, has not only provided investors with safer fixed-income alternatives but has also raised the cost of capital for businesses. This shift has adversely affected growth prospects and led to higher discount rates in financial projections, ultimately reducing company valuations.
Recent data underscores this risk-averse posture among investors. The Russell report indicates that strong market performance has largely been driven by large-cap stocks, which, despite recent volatility, continue to hover near all-time highs. In stark contrast, small-cap stocks languish below their early 2021 levels. This delineation in performance illustrates a broader trend: investors are increasingly shunning smaller companies, particularly those lacking a proven track record of profitability.
An April analysis by Ernst & Young’s George Chan further elucidates this shift, revealing a growing preference for IPOs from companies with established business models. Profitable companies constituted 59 percent of U.S. IPOs in the second quarter of 2025, a significant increase from just 29 percent in the first quarter. “Heightened market uncertainty, driven by trade tensions, regulatory shifts, and the disruptive rise of AI players, have further prompted investors to be more selective and seek more secure and predictable returns,” Chan writes. This selective approach compels potential IPO candidates to demonstrate robust financial performance and value creation potential to attract investment.
Compounding these challenges is the fallout from investments in special purpose acquisition companies (SPACs), which have seen a meteoric rise and fall since 2020. A report by corporate finance expert Michael Eisenband highlights that while 750 large U.S. SPACs raised a staggering $210 billion in equity capital for IPOs between 2019 and 2022, these SPACs were valued at just 43 percent of their IPO price by mid-2024. This sharp decline stands in stark contrast to the S&P 500’s positive returns, painting a cautionary tale for investors.
On the issuer side, the regulatory landscape has also evolved, presenting hurdles for both small and large companies considering public listings. Increased direct listing costs, higher legal fees, and additional reporting requirements have made IPOs less appealing. Notably, the introduction of the “green accounting” mandate by the Securities and Exchange Commission in 2024 has compelled companies to disclose climate-related risks, a requirement that has faced legal challenges and further complicated the IPO process.
Looking ahead, for the IPO market to regain its footing, macroeconomic conditions must improve, and investors must rekindle their appetite for riskier assets. Earle posits that a resurgence in IPOs could be catalyzed by successful, high-profile listings that perform well in secondary markets, thereby rebuilding investor confidence. Additionally, regulatory clarity and a reduction in geopolitical uncertainty—particularly regarding America’s long-term tariff regime—could make public listings more attractive.
For investors eager to engage with emerging companies, private equity and private credit funds are becoming increasingly accessible to qualified retail investors. These vehicles offer a pathway to invest in up-and-coming businesses without the immediate volatility and risks associated with public markets.
In essence, the current state of the IPO market reflects broader economic uncertainties and a cautious investor psyche. While the allure of promising startups remains, the path to public markets is fraught with challenges that demand resilience and adaptability from both investors and potential issuers alike. As the financial landscape evolves, staying informed and strategic will be key for those looking to navigate this intricate terrain.
