The Trouble with Hot IPOs

Doug Walters, CFA

2026 is shaping up as the biggest IPO year in history, with multiple trillion-dollar companies coming to market. We look at what the academic research says about buying newly public stocks, why the unusually small floats on these mega-deals may make matters worse, and where disciplined strategies fit in.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

So much for the shrinking public markets. For years Private Equity propaganda has pushed the narrative that public equities are a shrinking breed. 2026 looks set to challenge that, with some large initial public offerings (IPOs) poised to launch.

This week, Cerebras Systems, an AI chipmaker pitched as the closest thing to a credible Nvidia challenger, made their way to the Nasdaq. The company priced shares at $185, well above its raised range of $150 to $160. When trading opened Thursday, the stock leaped to $350, nearly double the IPO price. It touched $385 intraday and settled around $311 by the close. As I write, it’s trading near $290.

That’s an extraordinary first day move up for the chosen few able to get allocations. For those that chased the shares at the open, that was an extraordinary move down the price dropped 24%. This is a familiar pattern. Once the initial pop is baked in, decades of academic research suggest the next several years tend to disappoint.

An Evidence-Based Take

Jay Ritter at the University of Florida has come to be known as “Mr. IPO” due to many years of documenting IPO behavior. His latest dataset, covering thousands of IPOs from 1980 through 2024, finds that the average IPO has a first day pop of 19%, then in the subsequent three years the company underperforms the broader market by roughly 20%¹. Roughly 60 percent of all IPOs since 1975 have produced negative three-year returns measured from the first day’s close, and nearly 4 in 10 lose more than half their value within that window.

The reasons are intuitive. Companies tend to go public when sentiment is very positive, when management can sell at favorable prices, and when underwriters can drum up the demand needed to push an offering through. That’s the opposite of when a value-conscious investor would want to buy. Cerebras priced above its range with demand reportedly running twenty times available shares. That’s great for the seller, but not ideal for the buyers.

Bigger Deals, Smaller Floats

Cerebras is only the warm-up act for 2026. SpaceX is reportedly seeking a valuation between $1.75 trillion and $2 trillion, with a roadshow possibly as early as June. OpenAI and Anthropic are both rumored for fourth-quarter listings at valuations approaching or exceeding a trillion dollars apiece. Combined, those three offerings could raise more capital than the entire U.S. IPO market did over the last two years. There are some unique considerations for these mega IPOs. Because of their size they won’t be floating the typical 15 to 25 percent range of shares. SpaceX is reportedly targeting just 3.75 to 5 percent. Tight supply meeting enthusiastic demand is part of why Cerebras popped 68 percent. It could also mean the historical underperformance data is optimistic for this cohort.

Passive Becoming Active

The index providers appear just as eager as the public to own these new market additions. Nasdaq has already changed its rules to allow mega-cap IPOs into the Nasdaq-100 after fifteen trading days rather than the usual year, and the S&P 500 committee is considering something similar. There is a risk that these index funds (and the ETFs and mutual funds that benchmark to them) may end up forced buyers near the top.

There’s a subtle connection here to our recent writing on momentum. One reason rules-based strategies like the momentum ETFs we own have done what they’ve done is precisely because they don’t chase. Index methodologies typically require six to twelve months of trading history before a stock is even eligible. By the time momentum picks up a new issue, the launch-day euphoria has either confirmed itself with real performance or quietly burned off. This discipline filters out the very behavior that has historically punished IPO buyers.

Avoiding Speculation

To wrap up, none of this means Cerebras itself is a bad business, and none of it means no IPO ever works out. Some do, spectacularly. But we don’t deal in speculation and hope. The body of evidence is pretty clear: the average newly public stock, bought at the prices retail investors can actually pay, has underperformed. With the largest IPO calendar in history about to unfold, with smaller floats than we are historically used to, that’s worth keeping in mind. The cleaner trade is to wait for true momentum to kick in.

1. Ritter, Jay R., “Initial Public Offerings: Updated Long-run Statistics,” University of Florida, Warrington College of Business (March 23, 2026).

An IPO is like a negotiated transaction… the seller chooses when to come public… and it’s unlikely to be a time that’s favorable to you.
Warren Buffett

The Week Ahead

Unless you are building a multifactor economic model, the various inflation reports from overseas will not be of significant interest. If reading minutes of a meeting is your thing, then you will get to peruse the minutes of the last meeting for the Chairman Powell era of the Federal Reserve. For investor types, Nvidia’s earnings is the main course as you sail into the Memorial Day long weekend. However, earnings from retail giants, especially Walmart, should be more than just an appetizer.

En Fuego

Nvidia’s earnings on Wednesday come on the heels of the stock’s 20% run this past month.

Nvidia is still the biggest company in the S&P 500, despite Alphabet, Google’s parent giving it a run recently. With option market implied volatility predicting a 7% move in the stock in either direction it should sway the direction of market on Thursday.
Results are expected to be strong with revenue up over 78% for the quarter and guidance indicating over 80% in the next quarter.
Expectations from investors are elevated, so CEO Jensen Haung needs to find even more to keep the party going.
Perhaps the details of his trip to China with the President will add the fuel.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on total client assets of over $2.9 billion* (as of 4.19.26).

Overview

Disclosures

Strategic Financial Services, Inc. is registered with the Securities and Exchange Commission (SEC) as an Investment Advisor. The term “registered” signifies compliance with regulatory requirements and does not imply a certain level of skill or training.

The information provided on our website, including weekly market commentaries, financial planning articles, and other educational resources, is intended solely for educational purposes. It is designed to offer insights into financial planning and investment management, aiming to enhance understanding of financial concepts, strategies, and market trends. This content should not be interpreted as personalized investment advice or a recommendation for any specific strategy, financial planning approach, or investment product. Financial decisions are deeply personal and should be made considering the individual’s specific circumstances, goals, and risk tolerance. We recommend consulting with a professional financial advisor for personalized advice.

Please be aware that Strategic Financial Services, Inc. does not provide legal or tax advice. The content on this website is not intended to be used as such or as a substitute for legal or tax advice from a licensed professional. We advise seeking guidance from qualified legal and tax advisors regarding these matters.
Investment Risks and Portfolio Management.

The discussion of any investments on this website is for illustrative purposes only and provides no guarantee that the advisor will make any investments with the same or similar characteristics as those presented. The investments identified and described herein do not represent all the investments purchased or sold for client accounts. The selection of representative investments to discuss is based on various factors, including recent company news or earnings releases.

It should not be assumed that any investments discussed were or will be profitable. All investments involve risk, including the potential loss of principal. There is no assurance that investments mentioned will remain in client accounts at the time you view this information.

When index returns are mentioned on this site, they are provided as a general indicator of market conditions and are not representative of any client’s portfolio performance. Indices are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

While index returns are used as a framework to report on general market conditions, they should not be construed as an indicator of future performance of any specific investment or portfolio. Discussion of index returns is intended to provide context and insight, not to suggest that clients will achieve similar results. Each client’s portfolio is managed according to their specific investment goals and financial situation.

The opinions and any forward-looking statements expressed in the articles and videos featured in our resource center are as of the date of publication. These statements are based on current laws, regulations, market conditions, and other relevant factors, including third-party data. Given the dynamic nature of financial and regulatory environments, as well as potential changes in market conditions or economic circumstances, the information provided may become outdated or may no longer be accurate.
We rely on third-party data to form our opinions and projections, which means that these are subject to the same uncertainties that affect all data-dependent analyses. As such, we advise readers to exercise caution and not rely solely on the statements made herein for making financial decisions. It is recommended that investors consult with a professional advisor who can help assess the relevance and accuracy of the content in light of the current economic climate and personal financial situation.

Our website contains links to third-party websites as a convenience to our users. Strategic Financial Services, Inc. does not control, endorse, or guarantee the content found on such sites. We are not responsible for the accuracy, legality, or content of the external site or for that of subsequent links.
Contact the external site for answers to questions regarding its content.
The inclusion of any link does not imply our endorsement of the site, nor does it imply any association with its operators. Use of any such linked website is at the user’s own risk.