Shunning IPOs as Too Risky, Investors Load Up on Large-Cap Stocks

‘Post-COVID, investors have become notably more risk averse,’ economist Peter Earle stated.

Traders work at the opening bell on the floor of the New York Stock Exchange on May 8, 2025. Timothy A. Clary/AFP via Getty Images

America’s equity markets are experiencing a dearth of new companies coming to market, with the result that stock market investors are increasingly concentrating their money in established, large-cap companies.

The past several years of solid stock market performance and historically high valuations for publicly traded U.S. companies would normally have brought a flood of new companies raising capital through initial public offerings (IPOs) of shares, a March report by Russell Investments states. But new issuance has thus far been anemic. 

The IPO market gives investors, including retail buyers, the opportunity to add up-and-coming companies to their portfolio, adding risk but gaining more upside potential.

It also allows them to diversify their portfolios away from a concentration in stocks like the so-called “magnificent seven”: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Together, these seven companies account for about one-third of the S&P 500’s total market capitalization and 43 percent of the NASDAQ 100.

But while the IPO market is currently trending upward, since 2022, it has consistently lagged well below the long-term annual average of $50 billion in capital raised. Analysts say there are several roadblocks that are keeping many smaller companies out of the market.

“The sharp drop in IPOs since COVID-19 can be attributed to a number of economic factors, all of which are interrelated,” Peter Earle, economist at the American Institute for Economic Research, told The Epoch Times.

Among them, he said, are “massive uncertainty, macroeconomic headwinds, tighter financial conditions, and valuation concerns.” 

Higher interest rates, implemented to tame inflation since the pandemic, not only offered investors safer fixed-income alternatives but also raised the cost of capital for companies while providing a drag on growth, he said. In addition, higher interest rates translated into higher discount rates in financial projections, which reduced company valuations. 

Investors Now ‘More Risk Averse’

These factors have played out in stock markets, as investor bets on established companies have paid off, while bets on small-cap stocks have lagged. According to the Russell report, the strong stock market performance since 2022 has predominantly been driven by large-cap stocks, which, despite recent volatility, “continue to trade near all-time highs, while small cap stocks are still languishing below their early 2021 levels.” 

Investors have responded by shunning smaller companies, especially those that don’t have a record of generating profits.

“Post-COVID, investors have become notably more risk averse,” Earle said. “That’s particularly the case where speculative or unprofitable companies are concerned.”

An April analysis by Ernst & Young (EY) IPO expert George Chan details a global shift toward buying IPOs of companies with a proven business model, with the share of profitable companies increasing from 29 percent of U.S. IPOs in quarter one of 2024 to 59 percent in quarter two of 2025.

“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. “IPO candidates are now compelled to showcase more robust financial performance and value creation potential to attract investment.”

Investor caution is also the result of recent losses from investments in special purpose acquisition companies (SPACs), which are listed “shell” investment vehicles that raise money to buy pre-IPO companies, thus allowing the companies to be publicly traded while avoiding many of the regulations and rigors of a public stock offering. 

A 2024 report by Michael Eisenband, a corporate finance expert at FTI Consulting, published by Harvard Law School, describes “the meteoric rise and fall of SPACs since 2020, when renowned investors, and often, famous celebrities were rushing to cash in on the SPAC craze, thereby providing potential investment targets with an end-run to a fast-tracked IPO and a public listing.”

Eisenband writes that 750 large U.S. SPACs raised $210 billion of equity capital for IPOs between 2019 and 2022, but these SPACs, on average, were valued at just 43 percent of their IPO price as of mid-year 2024. 

“This compares very unfavorably to a 15% return for the S&P 500 in 1H24 and a 23% return since June 2023,” he said.

Regulatory Hurdles Discourage IPOs

On the issuer side, both small and large cap companies face a higher regulatory burden to list on public exchanges, which has made some reluctant to do so. 

“Increased direct listing costs, higher associated legal fees, added obligations for senior executives, and additional reporting expenses were all cited as hinderances to all but the largest candidate companies undertaking an IPO,” the Russell report states.

These regulatory costs included the so-called “green accounting” mandate issued by the Securities and Exchange Commission in 2024, requiring listing companies to audit and disclose their “climate-related risks.” This rule was challenged in court, and under the Trump administration, the SEC declined to defend it. 

For the IPO market to return to trend levels, however, macroeconomic conditions would have to improve and investors’ appetite for riskier assets would have to return, Earle said.

“Any resurgence would be catalyzed by successful, high-profile listings that perform well in secondary markets, rebuilding confidence,” he said. “Regulatory clarity and a reduction in geopolitical uncertainty would additionally make public listings more appealing,” including in particular clarity regarding what America’s long-term tariff regime will be.  

And for those who still want exposure to up-and-coming companies, private equity and private credit funds are becoming increasingly available to qualified retail investors.