"You will see things you won't believe in your lifetime in securities markets. And the country will do very well over time, but you will see these huge waves — and then if you can stay objective throughout that, if you can detach yourself temperamentally from the crowd, you get very rich." — Warren Buffett on bubbles and market cycles

Intro

In any market, whether it's real estate or stocks, money moves in cycles. It floods into some places and drains out of others, and that rapidly changes the trajectory of a business's growth or decay. In a cycle, every security (any stock, bond, or asset you can buy) is affected differently, and some assets outperform others if they aren't well aligned with where the capital is flowing.

What are market cycles?

Market cycles form when something material changes in an industry: new tech, innovation, or a policy shift. These changes create openings for certain companies or sectors to grow faster and more profitably than they would in a normal market.

Cycles aren't random. They're the consequence of economic shifts. If you can identify the shift, you can build a position with an edge, before the majority catches on.

Secular vs. cyclical trends

These are just industry words for long-term vs. short-term. Knowing the difference can help you make more informed decisions about the timeline of your specific position.

Secular trends are long-term.They span years or decades. Think of the shift from mechanical power (humans and animals) to fossil fuels, or the current shift from fossil fuels to renewable energy. These unfold over many years; they don't happen overnight. During a secular trend, entire industries can be in growth mode at once.

Cyclical trends are shorter. They come faster and hit various industries differently. This could look like Fed rate cycles, commodity booms and busts, or simple earnings swinging up and down. They typically only last a few months to a year or two.

Most investors don't consider the two together. They see a company put up strong returns one year and instantly believe they've found a multi-year trade. But they don't look back far enough to see that last year's growth was a cyclical bump inside a secular (decades-long) uptrend. Understanding the two completely changes your exit criteria and holding period.

Cycles are invisible until they're over

Market cycles rarely have a clear, identifiable starting or ending point. You can identify them after the fact, once the data is obvious and speaks to you; but by then the trading edge is gone.

You can watch debt levels rising, valuations stretching (prices getting expensive relative to what companies actually earn), and new firms flooding the market. But calling the peak is a financial guessing game.

Where could we be right now?

We're four years into one of the biggest capital investment cycles since the American railroads: the AI infrastructure buildout.

In the second quarter, AI-related trades produced one of the strongest rallies we've seen — but it didn't come from the traditional "Magnificent Seven" (the handful of megacap tech names) that carried the first three years. Memory and hardware companies put up almost triple-digit gains in a single quarter.

That's the secular vs. cyclical distinction in action. The secular trend (AI infrastructure) is still intact. But within it, cyclical rotations are reshuffling the winners and investors who thought "the AI trade" meant "buy the same seven stocks forever" just learned the difference the hard way.

Nobody, not even the professionals, knows where we are in the cycle right now.

Bearish participants point out that valuations are stretched, and that companies are burning capital to fund data center buildouts instead of returning value to shareholders. The bulls point to AI hardware demand running so hot that suppliers can only fill half their orders, with customers signing commitments years into the future.

Both of those things are true at the same time. That's what the middle of a cycle feels like, and it's exactly why I told you cycles are invisible.

Why this matters for you

If the pros with billions of dollars and armies of analysts can't call the top, what makes you think you can? Your plan shouldn't depend on seeing what's next. It should survive without seeing it.