Elon Musk’s rocket company debuts on stock market; AI inflation concerns drag shares below launch price within three days; metaphors available
NEW YORK CITY / LOWER MANHATTAN
SpaceX debuted on the U.S. stock market at $135 per share following what financial media called a “ballyhooed debut,” which is the financial journalism term for a launch that generates more anticipation than a rational valuation model would justify and then produces exactly the price action that rational valuation models would have predicted if anyone had been consulting them. By the third trading day, shares had fallen to below $174 — wait, started at $135, peaked near $185, and retreated to below $174 — declining for three consecutive sessions as investors who bought the initial enthusiasm began selling the subsequent reality.
The S&P 500, coming off its eleventh winning week in the last twelve, responded to SpaceX’s decline with the equanimity of an index that has survived many individual stock stories and understands that the broader market and the particular fortunes of a rocket company are related but not identical propositions. The S&P rose 0.1 percent on Monday. SpaceX fell 6.1 percent. The Dow was up 220 points. Nobody who works in finance considers these contradictions. Numbers move. You watch the numbers.
Why SpaceX Fell: An Explainer for People Who Don’t Follow Markets
SpaceX’s post-IPO decline reflects a convergence of factors that, listed individually, sound manageable and, considered together, describe a market environment with significant headwinds for high-valuation technology stocks. The Iran war raised oil prices, which raised inflation, which raised the probability that the Federal Reserve will raise interest rates, which raised Treasury yields, which reduced the present value of future earnings, which hit hardest the companies whose valuations are based most heavily on earnings expected to occur in the distant future, which describes almost every company that has “soared in the mania around artificial-intelligence technology,” a category that SpaceX’s Starlink satellite internet service has been partially marketed into.
Traders are now pricing in a nearly 90 percent chance the Fed will raise its federal funds rate at least once by year-end, up from 57 percent a week ago. The 10-year Treasury yield climbed to 4.49 percent. These numbers mean that borrowing costs are rising, which compresses stock multiples for growth companies, which is what happens to the most expensive stocks when inflation and interest rate expectations shift — they shift most. This is not complicated. It is the same mechanism that has operated every time interest rates have moved in the history of financial markets. Financial media treats it as news each time it occurs.
The Finance Bros React
New York’s financial community, centered in lower Manhattan but distributed throughout a metropolitan area that produces more financial commentary per square mile than any region on earth, processed SpaceX’s decline through the specific cultural framework of people for whom every price drop is either “the dip” (an opportunity) or “a buying opportunity” (also the dip) or “a chance to dollar-cost average” (the dip at regular intervals).
“This is a dip,” said one equity analyst at a midtown firm, who asked not to be identified because his firm had a long position and his statement might be construed as promotional. “Fundamentals are unchanged. Launch cadence is unchanged. Starlink subscriber growth is unchanged. The stock is pricing in macro conditions that are temporary. This is a buying opportunity.” He paused. “That said, I’m not personally buying more right now. But that’s personal. The thesis is intact.”
Dr. Regina Cho, of the non-existent Columbia Business School Center for Narrative Finance Research, describes this response pattern as “the dip hypothesis,” whereby investors who believe in a company’s long-term value proposition are constitutionally unable to characterize any short-term price decline as negative information about their thesis rather than noise. “It is theoretically possible that they are right,” Dr. Cho said. “In which case it was a dip. It is also theoretically possible that the original valuation was too high. In which case it was a correction. We will not know which for at least eighteen months, at which point the people who were wrong will explain why they were right in a different way than the one they originally intended.”
The Broader Market: Oil, Iran, and the Fed
The week’s market dynamics were shaped by the Iran negotiations in Switzerland, where JD Vance and Iranian officials discussed a framework for peace. Brent crude oil prices fell 2.8 percent to $78.34 following weekend talks that “created a good foundation for a final deal” — a foundation that oil markets interpreted as directionally positive for supply restoration, lowering energy cost expectations, which theoretically reduces inflation pressure, which theoretically reduces rate hike urgency.
The Federal Reserve is expected to report on inflation Thursday, with economists projecting the consumer price index accelerated to 4.1 percent in May from 3.8 percent in April. If the projection is accurate, rate hike expectations will increase further. If the projection is wrong in the favorable direction, markets will rally. If the projection is wrong in the unfavorable direction, the market will produce a reaction that financial media will describe as “volatile,” which is the journalism term for “moved significantly in a direction that was surprising to the people who were wrong about it.”
SpaceX: What the Company Actually Does
Amid the financial narrative, it is worth noting that SpaceX has successfully launched more rockets than any other entity in the history of spaceflight, deploys and operates the Starlink satellite constellation that provides internet service to approximately 4 million subscribers globally, and has contracts with NASA and the Department of Defense that provide substantial non-market-dependent revenue. The company’s stock price is a market’s current estimate of the company’s discounted future value. The company’s actual operations are rockets, satellites, and the logistical infrastructure that makes them work. Both of these things are real. They are related. They are not the same thing.
The SpaceX communications team has not commented on the stock decline. They have been busy launching rockets. This is, arguably, the appropriate division of corporate attention: the finance people watch the stock, the engineers launch the rockets, and the commentators explain why the gap between the two is meaningful, temporary, or both simultaneously depending on the timeframe you choose and the outcome you’re hoping to justify.
SOURCE: https://bohiney.com