AI listing boom threatens to reverse a two-decade tailwind for US equities

For more than two decades, US companies have bought back far more stock than they have issued, steadily shrinking the pool of shares available to investors. AI and the return of US equity supply, a new paper by Sahil Mahtani, Director, Investment Institute, and Dan Morgan, Analyst, find that this trend, known as de-equitisation, has been a persistent support for US equity returns, adding an estimated 0.7 percentage points a year between 2015 and 2025.

That support is now ending. A wave of AI-related listings, including SpaceX, OpenAI and Anthropic, which together could raise US$200 to 250 billion in initial proceeds, together with fresh secondary issuance from established technology giants such as Alphabet and Oracle are beginning to reverse that trend. The market is shifting from a scarcity regime driven by buybacks to an abundance regime driven by increasing equity issuance and a new share supply.

The initial wave of AI listings is unlikely to overwhelm the US equity market. Nobody can know in advance when an AI investment boom will end, and the initial round of IPO proceeds, around 0.3% of the roughly US$75 trillion US equity market, is small enough for the market to absorb comfortably. 

The bigger risk lies further out. As lock-up periods expire and early investors, founders and venture backers become free to sell, the supply of tradable shares is likely to increase significantly. Companies typically float only a small slice of themselves at IPO, with free floats rising from around a quarter of the company to 70% or more within two years. Applied to a roughly US$4 trillion cohort of new AI companies, that points to an eventual increase in tradable US equity supply of close to 4%, equivalent to an expansion of the entire US public equity market on a scale last seen in the 1990s and early 2000s, concentrated mainly in 2027 and beyond.

Ninety One’s Capital Market Assumptions put expected US equity returns at 2.7% a year over the next decade in the base case, where recent buyback-driven trends broadly continue. That figure falls close to zero if market composition reverts to its long-run, century-average pace of net issuance, and to around -2.2% a year in a scenario resembling the dot-com-era bubble of 1995 to 2005.

The dynamic already has a precedent in emerging markets. During China’s IPO and MSCI index inclusion wave in the 2010s, expanding equity supply, combined with falling valuations, erased close to five to six percentage points of return a year for index investors. That structural headwind is now fading across emerging markets, led by China, just as a comparable dynamic now builds in the United States. Allocators who wrote off emerging markets on the back of a difficult decade, while leaning further into US equities, may want to reassess both markets.

Sahil Mahtani, Director, Investment Institute: “Everyone is focused on AI’s impact on demand. We’re asking investors to think about what it means for the supply of equity.  A shrinking supply of publicly traded shares has quietly supported US equity returns. That tailwind is now going into reverse. We’ve seen this mechanism before in emerging markets, particularly during China’s IPO and MSCI index inclusion wave, where expanding equity supply eroded years of returns, and the same dynamic is now assembling in the US, just as investors are focused almost entirely on AI’s upside.”

“This isn’t a call for a market top: issuance-based signals are notoriously poor at calling one in real time, and the US market is far too deep to be disrupted by the first round of deals alone. The more important question for long-term investors isn’t the size of the initial listings, but how long the resulting increase in equity supply persists, and whether the companies now joining the index can deliver the growth their valuations already assume. What is clear is that the de-equitisation that underwrote this bull market is ending. Over the next ten years, US equity returns are going to have to come from elsewhere,” Mahtani concluded.

Download a PDF of AI and the return of US equity supply click here