7/10/2024 Industrial Thought Leadership

Baird Continues to Lead in Industrial ECM

Baird’s Equity Capital Markets team actively participated in the increased activity in the Industrial sector during the first half of 2024. The team has successfully completed eight transactions and anticipates the recent momentum in Industrial activity to continue to build throughout the remainder of the year before calendars switch to 2025.

1H 2024 Market Highlights

Equity markets finished the first half of 2024 notably higher (13^th best start to a year) as equity issuance rebounded and had its best start since 2021, though overall offering activity remains 30% below 5-year averages (2015 to 2019)
The rally in equities has been supported by Big Tech and AI growth themes, with the Magnificent 7 driving the S&P 500 and Nasdaq to all-time highs by the end of Q2 while trading performance for the broader market deteriorated as the equal-weight S&P underperformed by 700 bps and small-caps experienced negative returns during Q2
The Fed repricing narrative was a major theme in 1H as the market is currently pricing in 2.0 cuts by year-end compared to the 5.5 cuts expected at the beginning of the year, citing the need for greater confidence in continued disinflation towards the 2% target rate
On the macroeconomic front, the sticky inflation narrative reversed in Q2 with lower inflation prints in April and May but was accompanied by the beginning signs of an economic slowdown and heightened consumer sentiment concerns following weaker retail sales and companies citing challenges surrounding an uncertain macro environment
Three $250M+ Industrial IPOs priced during the first six months of the year with a median 30-day return from offer price of ~31%; offerings included the 100% secondary $1.1B listing of UL Solutions, Southwest Gas’ $300M spin-off of Centuri and niche aerospace and defense components company Loar Holdings’ $354M deal
Sponsors and issuers alike took advantage of overall strong trading performance in 1H, with sponsors representing nearly 50% of all Industrial activity and select issuers tapping the public markets to opportunistically fund future growth plans
Overall, S&P Industrials were up ~7% in the first half compared to the S&P’s ~15% return

2H 2024 Market Outlook

One of the biggest risks to the market in the second half of the year is the potential for growth to slow in the Magnificent 7 stocks, though current earnings estimates signal broader growth in the market and could perpetuate the current bull market run
The market will be looking for clarity from the Fed on timing of the first rate cut given the recent disinflation traction, cooling of the labor market and weaker economic data, as there was some market repricing in favor of a more dovish Fed outlook; markets are currently pricing in a ~70% probability of a September rate cut
Even as 2024 earnings estimates for the S&P continue to trend sideways, it’s unusual to see the following year estimates rise higher as has been the case for 2025, currently at ~14%, and will be a key indicator for the sustainability of the bull market if projections hold relatively consistent throughout the remainder of this year
The upcoming Presidential Election holds headline risk for the market, though the conclusion of the election has historically been a tailwind for the equity markets into year-end regardless of the outcome during a re-election year
The discrepancy in performance between large and small-cap companies will be another key indicator to gauge the overall strength of further outperformance in the equity markets
Broader ECM activity is expected to continue its recent momentum as large issuers will lead the IPO market reopening, coupled with favorable receptivity from investors as the key driver for both issuers and sponsors to capitalize on recent market strength in the secondary market
Return of sponsored-backed Industrial IPOs following nearly three years of muted activity is expected to gain momentum heading into 2025 as IPO filings and the shadow backlog continue to grow