The principle known as Goodhart's Law posits that when a measure becomes a target, it ceases to be a good measure. This concept, articulated by British economist Charles Goodhart in the mid-1970s, observed the breakdown of the relationship between money supply and consumer prices once monetary authorities targeted monetary aggregates to curb inflation. Around the same time, index-based ETF investing, focused on passive asset allocation models, began to emerge. As the share of passive ETF funds in global investment assets has risen, Goodhart's Law is again in effect: index ETFs are no longer just reflecting the market; they are shaping it. This could become a very serious issue as Space Exploration Technologies Corp (SpaceX), the space exploration and AI leader founded by Elon Musk, prepares for an unprecedented record-breaking initial public offering (IPO).

SpaceX aims to raise approximately $75 billion at a valuation of around $1.75 trillion, with subsequent market reports suggesting its valuation target has approached or exceeded the $1.8-$2 trillion range. Regardless of the final figure, this will be one of the largest IPOs in history. A massive IPO for a company valued near $2 trillion could very well serve as a liquidity stress test for the U.S. stock market's AI trading theme and the global "AI super bull market." The real issue is not SpaceX's fundraising size alone, but whether it, combined with potential mega-IPOs from OpenAI and Anthropic (with a combined potential market cap approaching $4 trillion), will force mutual funds, active funds, and passive index funds to sell existing large-cap tech stocks to free up cash.

Reports indicate that major U.S. mutual funds and passive index funds have already begun increasing cash reserves and preparing to sell some existing large-cap holdings to prepare for large IPOs like SpaceX and OpenAI. As SpaceX will be quickly added to the Nasdaq 100 index, often seen as a global tech stock barometer, Wall Street analysts widely expect the giant to be included in more benchmark indices. This, combined with the fact that index funds' share of U.S. equity investments has risen from about 3% at the start of the century to roughly 53% by the end of last year, means index inclusion is no longer just a technical event but a source of valuation-insensitive, mechanical buying.

From a macro liquidity perspective, however, the SpaceX IPO is more akin to a local pump, not necessarily a systemic "master switch" triggering a bear market. The true preconditions for a complete "AI bubble" burst and a global equity bear market are not the unprecedented SpaceX IPO itself, but rather that IPO's extremely high valuation combined with record-breaking rises in long-term U.S. Treasury yields (10-year and above), a significant slowdown in corporate earnings, a deceleration in AI capital expenditure, widespread investor skepticism over AI revenue returns, and simultaneous pressures from passive fund mechanical rebalancing and active fund redemptions. A single IPO may be the spark, but macro liquidity, the pace of AI capital spending, and corporate earnings prospects are the core powder keg.

Goodhart's Law on Wall Street: AI Computing Investment Frenzy, Index Buying, and SpaceX's Listing Sound the Alarm for an AI Bubble Burst

Index investing draws inspiration from two slightly different philosophies. One, primarily championed by academia, argues that since stock prices accurately reflect all available information, investors cannot consistently outperform the market. The other views fund management as a zero-sum game where one participant's outperformance relative to an index necessarily comes at the expense of others. Picking winners is difficult and expensive. Proponents of both views have long maintained that investing in index funds does not affect prices, either at the individual stock or market level; the composition of index funds is weighted by the market capitalization of their constituents and adjusted dynamically based on the number of tradable shares—the so-called free float.

Passive investing started slowly but has grown robustly over the past twenty-five years. In a new paper, Rob Arnott of Research Affiliates and Lillian Wu of MGI Machine Guided Investments note that as of last year, 53% of U.S. equity investments were held by market-cap-weighted index ETF funds, far above the 3% at the start of the century. This success is easy to explain. Investors choosing market indices have significantly outperformed those sticking with traditional fund manager models. Last year, 79% of U.S. large-cap funds underperformed the S&P 500. The long-term record of active managers is even worse.

However, Arnott and Wu argue that passive investing has grown large enough to distort the market: "Once an index evolves from a measure of the market to a mechanism for investing in the market, its role changes fundamentally," they write. "The act of replicating the index begins to shape the very market it seeks to describe." For instance, when an index rebalances and reconstitutes, index investors automatically buy more of stocks whose prices have recently risen and reduce holdings of those that have fallen out of favor. In short, index funds buy high and sell low, reinforcing recent momentum trends—precisely the opposite of conservative investment practice.

The construction of low-cost passive tracking funds involves holding more of the largest companies by market cap. Arnott and Wu assert that the rising valuation premium enjoyed by U.S. mega-cap stocks is "likely a direct consequence of market-cap-weighted indexing, not a reward for superior growth." They note in their research that in recent years, the valuation of the largest 500 U.S. listed companies has soared relative to the next 500, despite the latter experiencing stronger fundamental growth.

Five years ago, Xavier Gabaix and Ralph Koijen proposed what they called the "inelastic markets hypothesis." The two economists claimed that, contrary to modern financial theory, the stock market is actually highly sensitive to fund flows. Because the supply of shares does not immediately increase to meet new demand, prices tend to adjust upward when money enters the market. In a truly efficient market, arbitrageurs would step in to pull prices back to fair value. But Gabaix and Koijen claim that, for various reasons, market arbitrage forces are insufficient to accomplish this task.

Index investing exacerbates this problem. According to data from the Investment Company Institute, U.S. active investment managers are experiencing massive outflows, totaling nearly $60 billion combined in March and April. Consequently, money flowing into the market is dominated by valuation-insensitive index funds.

Goodhart's Law has another often-overlooked feature: when a measure becomes a target, it often becomes profitable to manipulate that target. In the aforementioned research paper, Arnott and Wu observe that stocks added to an index tend to rise significantly. Therefore, "index inclusion tends to lock in exuberant valuations near the peak of a speculative narrative." This may explain why Elon Musk is so keen to get SpaceX—whose planned $75 billion IPO on June 12 would be the largest in history—into stock market benchmark indices as quickly as possible.

One of the world's largest benchmark index providers, S&P Global, had considered scrapping its long-standing rule that companies added to the S&P 500 benchmark must have been profitable for four consecutive quarters—a rule change that could have removed a hurdle for still-unprofitable SpaceX. The index provider also consulted on shortening the minimum waiting period between a company's IPO and its inclusion in the index. However, on Thursday, S&P Dow Jones Indices announced it had decided to maintain its profitability requirement.

The Nasdaq index is typically more accommodating. Today, the largest companies listed on its exchange need only trade for 15 sessions to join the Nasdaq 100 index. Previously, so-called "seasoning" requirements could last up to a year. The Nasdaq exchange has also eliminated the minimum 10% free float rule. The rocket+AI+energy storage "space AI super-empire" founded by Musk plans to issue only 3% to 4% of its shares. More importantly, companies with low free floats like SpaceX can now have a weight in the Nasdaq 100 index up to three times their size based on freely tradable shares.

Arnott roughly estimates that, under relaxed rule assumptions, index passive investment funds combined might need to buy up to 40% of SpaceX's issued shares post-IPO. To avoid tracking error—the deviation of an index from the performance of its underlying constituents—benchmark index funds that include SpaceX would have to buy regardless of price, essentially creating prime conditions for a potential short squeeze.

By several measures, current U.S. stock market valuations are at record levels. The top 10 companies in the S&P 500 account for a higher share of the index's market cap than ever before. Goldman Sachs highlights that nearly half of the U.S. market is exposed to the AI frenzy. The largest IPO in history is set to be supported by index funds buying irrespective of price. Passive investors seem to be playing the most active role in an AI boom that looks increasingly like an epic stock market AI bubble.

From AI Frenzy to SpaceX's Cash Drain: As a Wave of Mega-IPOs Hits U.S. Stocks, the 'AI Super Bull Market' Faces a Stress Test

Undoubtedly, SpaceX's massive IPO, with a market cap nearing $2 trillion, could indeed serve as a liquidity stress test for the U.S. stock market's AI trading theme and the global "AI super bull market." However, equating it directly with "inevitably popping the AI bubble, draining liquidity, and triggering a bear market" is overly simplistic. Passive funds are no longer just reflecting the market; they are shaping prices through index replication and mechanical buying. The global "AI super bull market" is entering a liquidity stress test formed by the interplay of index mechanisms, passive capital, and IPO supply.

Index inclusion triggers mechanical buying that ignores valuation, especially when giants with low free floats like SpaceX quickly enter indices like the Nasdaq 100 or FTSE Russell. This could lead to passive funds simultaneously "selling + scrambling for shares," creating local short squeezes. Therefore, the real problem is not SpaceX's fundraising size alone, but whether it, combined with potential mega-IPOs from OpenAI and Anthropic, will force mutual funds, active funds, and passive index funds to sell existing large-cap tech stocks on a large scale to free up cash.

Passive investing has effectively transformed from a "market mirror" into a "market engine." As index funds' share of U.S. equity investments rose from about 3% at the century's start to roughly 53% by last year's end, index inclusion is no longer just a technical event but a source of valuation-insensitive, mechanical buying. If SpaceX goes public with a minimal free float and quickly enters the Nasdaq 100, Russell, or other indices, passive funds, to avoid tracking error, may have to buy a significant proportion of the available float in a short time, creating a "passive buying squeeze."

Research cited by MarketWatch suggests that if SpaceX quickly enters major indices, passive funds may need to buy about 24% of its publicly available float; including active funds benchmarked to related indices, index-related capital could hold close to half of SpaceX's float.

However, mitigating factors also exist. S&P Dow Jones Indices has decided not to change S&P 500 inclusion rules, meaning it won't scrap existing profitability and listing duration requirements for newly listed giants like SpaceX and OpenAI. This weakens the most extreme scenario of "SpaceX being forced into massive passive buying by S&P 500 funds immediately upon listing."

Latest views from strategists at Wall Street firm Jefferies show that the S&P 500 index has about $11.2 trillion in passive funds tracking it. Theoretically, a company with a $100 billion market cap being added could attract about $17.8 billion in passive inflows. However, with S&P refusing to fast-track SpaceX, liquidity pressure may shift more toward the Nasdaq 100 and related tech indices rather than pressuring the entire S&P 500 simultaneously.

Goldman Sachs' latest research indicates that even if total U.S. equity issuance in 2026 reaches about $600 billion, it would be less than 1% of the total U.S. stock market capitalization. Theoretically, the market can absorb it, though it may periodically squeeze small IPOs and some highly crowded positions. Goldman states that even raising the 2026 IPO fundraising forecast to $225 billion and including follow-on offerings, convertible bonds, SPACs, etc., to form a larger equity supply, the proportion relative to total U.S. market cap and historical percentiles remains within historical norms. More crucially, U.S. corporate buybacks remain the market's strongest source of demand, and Goldman expects the S&P 500 to still have earnings growth support.

The SpaceX IPO is more like a local pump, not a systemic "master switch" that inevitably triggers a bear market. The SpaceX IPO may not autonomously and naturally burst the U.S. stock market's AI bubble, but it could become a turning point event where the AI super bull market shifts from "indiscriminate rally" to a "re-screening based on valuation, earnings, cash flow, and market liquidity." The true preconditions for a complete "AI bubble" burst and a global equity bear market are not the unprecedented SpaceX IPO itself, but rather that IPO's extremely high valuation combined with record-breaking rises in long-term U.S. Treasury yields (10-year and above), a significant slowdown in corporate earnings, a deceleration in AI capital expenditure, widespread investor skepticism over AI revenue returns, and simultaneous pressures from passive fund mechanical rebalancing and active fund redemptions.