No one can predict how the markets will go but here are some signs that the markets are in a state of optimism. I’ll show you the exhibits first and then explain later.

 

The Exhibits

zuckerberg3rdRichest

Exhibit 1: Zuckerberg passes Buffett to become the world’s third-richest person

FAANG

Exhibit 2: FAAM makes up 10% of the S&P 500

What does all this mean?

It’s pretty obvious that markets are celebrating growth stocks and there is nothing more representative of growth than the tech sector.

Is this a repeat of the dot-com bubble? No, it isn’t.

First, the dot-com bubble was a bubble because it was built on air. Earnings and cash flows were non-existent and yet companies were being valued more than companies that had actual businesses. The FAAM or FAANG (apart from Netflix) stocks represent businesses that have solid earnings and cash flows.

However, we cannot deny the flow of money into the tech sector.

Therefore it should be no surprise that Mark Zuckerburg has passed Warren Buffett on the World’s Richest List. The writing was probably on the wall when Bezos passed Buffett and Gates. This is just a byproduct of the flow of money into tech stocks and therefore inflating* the wealth of these CEOs whose fortunes are closely tied to this sector.

Why the rotation to tech?

My interpretation of the rotation to tech is that people are optimistic. We’ve come on the back of a 20% increase in markets (or more if you were in tech) last year and hope is still present in the minds of investors.

Furthermore, earnings figures back it up. The established side of tech is still seeing a growth in earnings and that’s fueling the growth in money that’s being funnelled towards the start-ups seeking venture capital. People are still hopeful that one of these will establish a new order and be the new Google, Microsoft, or Facebook. Of course, whatever company comes next won’t be a successor to these companies but a company, based on new technology, that disrupts the old way of doing things. For example, Amazon has fundamentally changed the book business. In a larger way. retail has also been hit by Amazon and Alibaba.

What everyone seems to be eyeing these days is a disruption in payments and the banking sector. That’s the hype behind blockchains and robo-advisors. Many people will read this and think that what I’m saying is that all these new-fangled tech are just bubbles waiting to evaporate.

I’m not.

The tech could work out. The problem is that many other tech or companies with the similar tech could work out as well. This would dampen any returns to any given company so if you pay the sky for a company promising the next biggest thing, you still may not make much on your investment if there are lots of competitors for this company’s product.

I’ve digressed a little but the main thing is that the fact that we’re seeing this rotation to tech is due to investors being willing and able to take on a little more risk today. This risk is not the volatility that these investments might go through but rather the fact that these investments may not even pay off due to the uncertainty behind how profitable they are.

Last Word

The point I’m making is that what we’re seeing in the U.S. markets today is a sign of the times. People are willing to bet on unsure things and what we’re seeing are sure signs of that.

Notes:

*I don’t mean to use inflating in a way that suggests that the increase is temporary or illusory although, in a sense, it is.

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