3 Things We're Watching: IPO 'Fast Entry’ Rules; Rising Bond Yields, AI's Next Wave

1. Fast tracking super-sized IPOs

Over the next few months, several big-name tech companies are expected to be going public. If you’re wondering when those stocks might show up in the ETFs and mutual funds you’re holding, the answer might be: sooner than you think.

On May 1, new “fast entry” rules took effect, allowing newly listed companies to join the Nasdaq-100 Index just 15 trading days after going public (down from a previous waiting period of at least three months). The rule applies only to so-called mega-cap initial public offerings (IPOs) – those of companies big enough to rank among the index’s top 40 members, a bar that currently sits at a market capitalization of roughly US$100 billion. Nasdaq also dropped a rule that previously required companies to have at least 10 per cent of their shares available for public trading before entering the index.¹ S&P Dow Jones Indices, which operates the Dow Jones Industrial Average and the S&P 500, two other key U.S. benchmarks, is reportedly looking at changing its entry requirements too.²

The bottom line: If you hold an ETF that tracks the Nasdaq-100, the new rules could mean gaining exposure to newly public companies much sooner than before. The index is tracked by more than 200 investment products holding over US$600 billion in assets,³ and they effectively have to buy newly added stocks to match the benchmark. For example, if a large company is added to the Nasdaq-100 and it makes up 3 per cent of the index, funds that track the index adjust accordingly by buying the stock and selling others.⁴ That brings with it the potential to push up demand for the new stock soon after a listing. But is faster always better? Earlier access gives investors quicker exposure to potential growth, but IPO stocks’ volatility tends to be highest right after they’re listed, and this can persist for months.

2. The yield squeeze

What does the war in Iran have to do with the cost of a Canadian mortgage? More than you might expect. With Middle East tensions continuing to create uncertainty and with inflation starting to increase, global bond investors are feeling jittery, which in turn is causing yields to rise. The Canadian five-year bond yield is currently 3.10 per cent at the end of May, up from 2.71 per cent in February.⁵ (U.S. 30-year Treasury yields have moved above five per cent for the first time since 2007.⁶)

Given that fixed mortgage rates are closely tied to five-year bonds, mortgage rates have also climbed, with Ratehub data showing five-year fixed rates rising from 3.79 per cent in March to 4.04 per cent in April.⁷ That’s making it more expensive for homeowners to borrow, and also making it more difficult for some Canadians to qualify for a loan.

The bottom line: Higher mortgage costs are a real concern, with conditions worsening in 12 of 13 major housing markets in April.⁸ But rising bond yields might also create opportunities. Fixed-income investors can now buy bonds with higher yields than they could just a few years ago, which, as RBC Wealth Management notes, may make longer-term Canadian government bonds more appealing to investors.⁹ (On the flipside, investors holding bonds right now may see muted returns, as bond prices fall when yields rise.) Going forward, stubborn inflation could keep borrowing costs elevated, while signs of cooling might offer some relief.

3. Who gets paid as AI scales?

In recent weeks, Nvidia, AMD, TSMC and other AI infrastructure stocks have delivered strong Q1 earnings reports, suggesting that demand remains exceptionally strong in this sector, primarily fuelled by large data centres.

Given how well these and similar companies have performed over the past two years, the AI trade seemed fairly straightforward: Buy the companies making the chips, says Jordan Wong, portfolio specialist at RBC Global Asset Management. But investors are increasingly asking questions about what comes next, he notes.

One of these questions is who else gets paid as AI grows. Computer chips remain central, but they are only one part of the system. As AI becomes more complex, demand is also rising for memory, networking, power, cooling and the infrastructure needed to support large data centres – and that could mean new opportunities for investors seeking more than semiconductors.

Another question: who funds AI? Big tech continues to spend heavily to build the computing capacity to support AI,¹⁰ but investors are increasingly watching for evidence that those investments will translate into productivity gains, stronger revenue and long-term returns.

The bottom line: The latest results suggest the AI story is far from over. “The opportunity remains significant, but the market is likely to increasingly separate companies that simply talk about AI from those that can capture real economics from it,” says Wong. For investors, excitement may no longer be enough. The market increasingly wants proof that AI can translate into lasting profits.