A major trend holding back Wall Street could reverse itself in 2024

Dealmaking is the bread and butter of Wall Street — but by some accounts this has been the worst year for mergers and acquisitions in about a decade. Initial public offerings have also suffered along the way, with very few companies making their stock market debuts.

In 2023, global IPO volumes fell 8%, according to EY data. Proceeds from those IPOs dropped by 33% compared to the year prior.

Meanwhile, the value of deals around the globe is pacing to fall below $3 trillion this year for the first time since 2013, according to Bloomberg data.

That means Wall Street bonuses might be slimmer this year, sure. But it also has larger implications for Main Street.

IPOs and M&A help move money from large, established companies to innovative and growing companies — they support job creation, economic expansion and technological advancement.

Still, some experts say that 2024 is looking better for dealmaking.

What’s happening: The stock market has been strong this year and economic data has been resilient, but dealmaking hasn’t seen the benefit of those tailwinds.

Instead, high interest rates, growing geopolitical tensions, antitrust scrutiny and recession fears have sustained a dealmaking rut.

“Over the past year, M&A dealmakers have confronted their most prolonged challenges since the 2008–2009 financial crisis,” wrote analysts at the Boston Consulting Group in a year-end analysis.

Many companies that did make their public debut this year saw share prices fall, scaring others away from doing the same.

Instacart’s September IPO opened at $42 per share, propelling the tech-enabled grocery-delivery company to a market valuation of just over $11 billion. Shares of the stock closed at just $24.61 on Tuesday, with a market cap of about $6.9 billion.

Also in September, Software vendor Klaviyo priced its stock at $30 per share. It closed at $27.34 on Tuesday.

“After two years of muted listings, IPO issuers and investors were keen to take the ride of a market upswing, but this enthusiasm dampened after September when high-profile IPOs sank underwater, impacting market sentiment,” wrote analysts at EY.

What’s next: Experts say that 2024 could bring some good news to the dealmaking market.

Private equity is sitting on a record $2.6 trillion of “dry powder” (capital that’s been committed but still waiting to be invested) according to S&P Global Market Intelligence and Preqin data. That means that there’s a lot of money readily available for M&A activity.

Big differences between sellers’ and buyers’ pricing expectations have also stymied dealmaking this year, said BCG (just look at the recent US Steel deal — Japan’s Nippon Steel is paying a 142% premium for the US company).

But those differences should narrow in 2024 as interest rates fall and markets and the economy continue to stabilize, said BCG. Less volatility means more dealmaking.

Sectors to watch: Companies are obsessed with artificial intelligence and will likely make deals to acquire the new technology, said the EY report.

“AI has presented companies with an opportunity to revolutionize productivity, expand their product offerings and enter new markets. Demand for these technologies has also helped drive tech stocks: The sector has outperformed the S&P 500 by about 10% since the start of 2022,” wrote analysts.

Tech M&A volume and value grew last quarter, up from the first half of the year.

The energy sector has also seen growth in M&A plans this year.

More than $332 billion in transactions valued at $100 million and above were announced by US energy companies in 2023, according to EY. That’s a lot higher than in 2022.

Energy stocks have outperformed the S&P 500 by about 54% since the start of 2022.

Yes, but: This week, the FTC and DOJ announced that they have finalized 11 new guidelines for mergers in the US. These guidelines would be the biggest changes to the way US regulators review M&A in 40 years, according to Mitch Berlin, a vice chair at EY.

“[Executives offices and boards] will face a steeper climb to gain regulatory approvals and should immediately start preparing for the lower thresholds that will trigger a presumption of anticompetitive effects and increased levels of information flow,” he said.

Berlin estimates that these changes could add an additional two to three months to merger timelines.

The Dow just reached its fifth record high in a row

The Dow jumped another 250 points to about 37,558 on Tuesday, closing out its ninth winning day and fifth consecutive record high.

The S&P 500, meanwhile, closed at 4,768, just 0.6% below its previous record of 4,796, set in January 2022.

It’s been a great few weeks for stocks as the market’s year-end rally marches on and Wall Street continues to ride euphoric waves set off by last week’s Federal Reserve meeting. Officials at the policy meeting said they would keep interest rates steady again after almost two years of aggressive rate hikes and indicated that they expect three rate cuts in 2024.

The Fed’s dovish pivot and a slew of strong economic reports have buoyed investors’ spirits in the final weeks of the year. They appear to believe that interest rate cuts and a resilient economy, known as a soft landing, are now achievable in 2024.

A market mismatch: But some of these lofty dreams appear to be fueled by eggnog instead of reality.

The Fed has signaled the possibility of three rate cuts in 2024, but markets are currently expecting a lot more. According to the CME FedWatch tool, investors now see six rate cuts next year.

This mismatch in expectations could lead to a market comedown. Federal Reserve Bank of Atlanta President Raphael Bostic said on Tuesday that there is no urgency at the central bank to lower interest rates.

“For me, I’m thinking inflation is going to come down relatively slowly in the next six months, which means there’s not going to be urgency for us to pull off our restrictive stance,” he said during a roundtable discussion in Atlanta.

On Monday, Chicago Fed President Austan Goolsbee told CNBC that he was “confused” about the jubilant market reaction to the central bank decision last Wednesday.

“It’s not what you say, or what the chair says. It’s what did they hear, and what did they want to hear,” Goolsbee said on CNBC’s Squawk Box. “I was confused a bit — was the market just imputing, here’s what we want them to be saying?”

Treasuries, meanwhile, continued to show that investors think Fed cuts are coming soon. The yield on the 10-year US Treasury note fell again on Tuesday after dropping below 4% on Thursday to reach its lowest level since July.

Your whiskey is safe for the holidays

Christmas came early for US whiskey makers.

Before the Bell has previously reported that the EU, the largest export market for American whiskey, was set to impose a 50% tariff on imports of the golden liquor next year.

Spirit industry advocates said that would be a devastating blow to the $5.1 billion whiskey industry and the US economy.

But the crisis has been averted. For now, at least.

The US and EU have agreed to extend the suspension of EU tariffs on American whiskey until March 31, 2025.

It’s not a permanent change, but it’s a start.

“We urge the Biden administration to continue striving for a permanent end to all debilitating tariffs in disputes unrelated to the spirits sector,” said Distilled Spirits Council president and CEO Chris Swonger in a statement on Tuesday. “Until the threat of these tariffs returning is fully removed, the uncertainty will continue to restrict American Whiskey export growth in our most important international market.”