Goodhart's Law penetrates Wall Street! SpaceX's record-breaking IPO turns the index from a "market mirror" into a bubble engine. The AI bull market faces a major liquidity test.

Goodhart's Law states that when a measure becomes a target, it ceases to be a good measure. British economist Charles Goodhart proposed this idea in the mid-1970s, noting that once monetary policy authorities used money supply as a target to slow down inflation, the relationship between money supply and consumer prices would completely break down. Index-based ETF investments focusing on passive asset allocation patterns also emerged around the same time. As passive ETF funds continue to increase their share of global investment assets, Goodhart's Law comes into play again: index ETFs are no longer just reflecting the market, but shaping it. With Elon Musk's space exploration and artificial intelligence leader SpaceX preparing for an unprecedented record-breaking IPO, this could be a very serious issue. SpaceX plans to raise about $750 billion at a valuation of around $1.75 trillion, with market reports suggesting that its valuation target had at one point reached or exceeded the $1.8-2 trillion range; whichever it ends up at, it will be one of the largest IPOs in history. The potentially $2 trillion valuation of SpaceX's IPO could indeed be a liquidity stress test for the US stock market's AI trading theme and even the global stock market's "AI super bull market," as it may force mutual funds, active funds, and passive index funds to sell existing large-cap tech stocks to free up cash. Reports suggest that large US mutual funds and passive index funds have begun increasing cash reserves and preparing to sell off some of their existing large-cap holdings to cope with large IPOs like SpaceX and OpenAI. As SpaceX is quickly included in the Nasdaq 100 index, known as the "global tech stock benchmark," Wall Street analysts widely expect this giant to be included in more benchmark indices, further increasing the percentage of index funds holding US stocks from about 3% at the beginning of the century to around 53% by the end of last year. However, from a macro liquidity perspective, the SpaceX IPO is more like a local siphon than the "main gate" that triggers a systemic bear market. The real conditions that could lead to a complete collapse of the "AI bubble" and even a global bear market are not just the unprecedented IPO of SpaceX itself, but also the extremely high valuation of SpaceX's IPO combined with record-breaking long-term US Treasury bond yields, significant slowdown in corporate profits, sluggish AI capital spending, unanimous questioning of AI revenue returns by investors, mechanical re-balancing of passive funds, and pressure from active fund redemptions. The single IPO is the spark, but macro liquidity, AI capital spending pace, and corporate profit prospects are the core gunpowder. Goodhart's Law on Wall Street: AI computing investment frenzy, index buying pressure, and SpaceX IPO spark "AI bubble burst" warnings Index investing is inspired by two slightly different ideas. One view, mainly promoted by academia, argues that because stock prices accurately reflect all available information, investors do not have the ability to outperform the market. The other view believes that fund management is a zero-sum game, where one participant's outperformance relative to the index comes at the expense of other investors. Selecting winners is a difficult and expensive job. Supporters of both views have long believed that investing in index funds does not affect prices, whether at the individual stock level or market level; index funds are composed of market-capitalization weighted stocks and dynamically adjusted based on the trading volume of freely tradable shares. Passive investment started slowly but has grown significantly over the past twenty-five years. Rob Arnott of Research Affiliates and Lillian Wu of MGI Machine Guided Investments argued in a new paper that as of the end of last year, 53% of US stock market investments were held by market-capitalization weighted index ETF funds, far higher than the 3% in the early 21st century. This success is easily explained. Investors selecting market indices have performed much better than those sticking with traditional fund management models. Last year, 79% of large-cap funds in the US underperformed the S&P 500 index. The long-term record of active managers is even worse. However, Arnott and Wu assert that passive investing has grown to a size that can distort the market: "Once the index evolves from a measure of the market to a market investment mechanism, its role undergoes a fundamental transformation," they wrote. "Replicating the index starts to shape the market it originally sought to describe." For example, when indexes rebalance and reconstitute, index investors automatically buy more stocks that have recently risen in price, reducing their holdings of those stocks that have fallen out of favor. In short, index funds buy high and sell low, reinforcing recent momentum trends, which goes against conservative investment practices. The construction of low-cost passive tracking funds involves holding more of the largest companies by market capitalization. Arnott and Wu argue that the premium valuations enjoyed by US mega-cap stocks are continuously rising, "likely a direct consequence of market-capitalization-weighted indexation, rather than a reward for superior growth." They state in their research report that in recent years, the valuation of the top 500 publicly listed companies in the US has surged relative to the subsequent 500 companies, even though the latter have experienced stronger fundamental growth. Five years ago, Xavier Gabaix and Ralph Koijen put forward their so-called "inelastic market hypothesis." The two economists claimed that, contrary to modern financial theory, the stock market is actually highly sensitive to capital inflows. Because stock supply will not immediately increase to meet new demand, prices tend to adjust upwards when capital flows into the market. In a truly efficient market, arbitrageurs would intervene to bring prices back to fair value. However, Gabaix and Koijen argue that for various reasons, market arbitrage forces are not sufficient to accomplish this task. Index investing exacerbates this problem. According to data from the Investment Company Institute, US active investment management organizations are experiencing large outflows of funds, totaling nearly $60 billion in March and April. Therefore, the capital flowing into the market is predominantly driven by index funds, which are not sensitive to valuations. Goodhart's Law also has another often overlooked feature: when a measure becomes a target, manipulating this target often becomes profitable. In the aforementioned research paper, Arnott and Wu observed that stocks included in the index often experience significant increases in value. Therefore, "being held in an index often locks in elevated valuation near the peak of a speculative narrative." This may explain why Elon Musk is so eager to have SpaceX - whose $750 billion IPO scheduled for June 12 will be one of the largest IPOs in history - quickly enter the stock market benchmark indices. One of the largest benchmark index providers in the world, Standard & Poor's, has considered changing its long-standing rule that companies included in the S&P 500 index must achieve profitability for four consecutive quarters; if this rule is indeed changed, it could remove a barrier for SpaceX, which is still in a loss-making state. The index provider also consulted on whether to shorten the minimum waiting period between a company's IPO and its inclusion in the index. However, on Thursday, this S&P Dow Jones Indices provider announced that it had decided to maintain its profitability standards. Nasdaq indices are typically more compliant. Today, companies listed on its exchange need only 15 trading days to join the Nasdaq 100 index, whereas previously, the so-called "maturity" requirement could last for up to a year. The Nasdaq stock exchange has also dropped the rule of a minimum 10% free float ratio. SpaceX, founded by Musk, plans to list only 3% to 4% of its shares as part of its space AI super-empire program including rockets, AI, and energy storage. Moreover, companies with relatively low free float ratios like SpaceX now have the highest weight in the Nasdaq 100 index, reaching up to three times their free tradable stock size at one point. Arnott roughly estimates that, under the assumption of relaxed rules, index-based passive investment funds collectively may need to buy up to 40% of SpaceX's issued shares post-IPO. In order to avoid tracking error, where the index deviates from the overall performance of its constituent stocks, those benchmark index funds including SpaceX may have to price-insensitively buy, which essentially creates ideal conditions for potential short squeezes. By multiple indicators, the current valuation of the US stock market is at record levels. The weighted share of the top 10 companies in the S&P 500 index is higher than ever before. Goldman Sachs emphasizes that nearly half of the US market is exposed to the AI frenzy. The largest IPO in history is set to be supported by price-insensitive buying from index funds. Passive investors seem to be playing the most active role in this increasingly epic AI bubble and artificial intelligence prosperity scenario in the stock market. From the AI frenzy to the SpaceX fundraising black hole! As the giant IPO wave sweeps through the US stock market, the "AI super bull market" faces a stress test. There is no doubt that the trillion-dollar SpaceX IPO could indeed be a liquidity stress test for the US stock market's AI trading theme and even the global stock market's "AI super bull market" scenario, but equating it directly to "definitely bursting the AI bubble, draining liquidity, and triggering a bear market" may be too linear. Passive funds are no longer just reflecting the market, but are shaping prices through index replication and price-insensitive buying. The global "AI super bull market" is undergoing a liquidity stress test composed of index mechanisms, passive funds, and IPO supply. Index inclusion triggers price-insensitive buying, especially when giants like SpaceX with low free float are rapidly included in the Nasdaq 100 or Russell indices, potentially leading to simultaneous passive fund "selling + buying" and creating localized short squeezes. Therefore, the real issue is not just the scale of SpaceX's fundraising, but the possible need for mutual funds, active funds, and passive index funds to sell off existing large-cap tech stocks to free up cash after large IPOs like SpaceX and OpenAI. Passive investing has transitioned from being a "market mirror" to being a "market engine," as the percentage of US stock market investments held by index funds has risen from about 3% at the beginning of the century to around 53% by the end of last year, and index inclusions are no longer just technical events but bring about price-insensitive buying. If SpaceX goes public with a very low free float, and quickly enters the Nasdaq 100, Russell, or other indices, passive funds may have to buy a significant proportion of tradable shares in a short period, creating a scenario conducive to potential short squeezes. But there are also mitigating factors. S&P Dow Jones Indices has decided not to change the rules for inclusion in the S&P 500, meaning that SpaceX, OpenAI, and other new IPO giants will not be automatically included without meeting the existing profitability and listing time requirements; this weakens the most extreme scenario of "SpaceX being forcibly bought by massive passive funds as soon as it goes public." The latest view from the strategy team at Wall Street major Jefferies shows that the S&P 500 index has about $11.2 trillion in passive funds tracking it, and if a $100 billion market value company is included, it could theoretically attract about $17.8 billion in passive inflows; however, with S&P keeping a lid on rapid inclusion of SpaceX, the fund pressure may shift more towards the Nasdaq 100 and related tech indices, rather than the entire S&P 500 facing simultaneous pressure. Goldman Sachs' latest research report shows that even if the total US equity issuance reaches around $600 billion by 2026, it would be less than 1% of the US stock market's total market cap, theoretically absorbable by the market, albeit leading to temporary pressures on small IPOs and certain crowded positions. Goldman argues that even adjusting the 2026 IPO financing forecast to $225 billion and including additional equity issuance, convertible bonds, SPACs, etc., the market size remains within historical norms in proportion to US stock market total valuation and historical percentiles; more importantly, US corporate buybacks remain the strongest demand in the market, and Goldman expects the earnings growth support to continue for the S&P 500 index. The SpaceX IPO is more like a local siphon than the "main gate" that inevitably triggers a systemic bear market. The SpaceX IPO may not autonomously and naturally burst the US stock market's AI bubble, but it may be a turning point event for the AI super bull market's shift from "indiscriminate rise" to "re-evaluation based on valuation, earnings, cash flow, and market liquidity." The real conditions that could lead to a complete collapse of the "AI bubble" and even the global stock market falling into a bear market are not just the unprecedented IPO of SpaceX itself, but also SpaceX's extremely high valuation IPO combined with record-breaking long-term Treasury bond yields, significant slowdown in corporate profits, sluggish AI capital spending, unanimous questioning of AI revenue returns by investors, and the simultaneous appearance of passive fund mechanical re-balancing and active fund redemption pressures.