May 2026
A new industrial revolution
The crisis in the Strait of Hormuz has refocussed investors, and the world, on physical commodity flows, geography and maritime chokepoints – considerations of diminishing importance throughout the post-global financial crisis (GFC) decade of big tech’s ascendancy.
In March everyone took a brief break from their apps and got a map out to find out where on earth this narrow body of water actually was. But mapping the globe’s geography has always been economically essential to viewing the world.
Investors, like sailors, rely on maps – frameworks to navigate markets. The problem is that the maps which have guided investors for the past 40 years are becoming less useful.
Old maps for an old world
Falling rates, stable inflation, intangible assets and infinite scalability were the points of the compass investors used to find the fabled asset light, quality compounders. It didn’t matter that these purely financial metrics were unrelated to physics because they successfully navigated the market’s contours.
The endpoint of investors’ travels was the software company: no physical assets and seemingly unlimited growth potential meant high margins justified lofty multiples of not just earnings, but sales.
In 2011, famed venture capitalist Marc Andreesen said that software is eating the world. But what if now the physical world is eating software?
Do investors have the right maps to navigate such a world?
Price-to-sales ratios are useful because they tell you how investors are valuing a stock’s sales through a cycle, often relative to the margins they can earn – higher margins can justify higher multiples of sales. But a low price-to-sales ratio is highly predictive of strong forward performance, and a high ratio is riskier.
The rotation from digital to physical
The Tech-Software ETF (IGV) steadily outperformed physical world areas like Industrials (ETF: XLI) for 20 years, as margins expanded and sales were valued more highly. Yet it is no coincidence the ratio of outperformance for Software to Industrials peaked in 2021 with the turn in interest rates and inflation. Capital is rotating from the digital to the physical in a less stable macrocosmic and geopolitical world.
AI disruption fears have triggered a 30% fall in IGV since late October 2025, but that looks more like a catalyst than the whole story – when high multiples collide with questions of revenue and margin durability, sharp drawdowns occur.
Software doesn’t need to collapse further from here for this rotation to continue. If its progress is just stalled – as fundamental reality (potentially lower margins) catch up with investor’s old maps (high price-to-sales ratios) – the rotation from digital to physical will remain the relative strength in the market.
Industrials could nearly double relative to Software (either by Industrials going up, Software going down or both) just to get back to where they traded relatively before the GFC, which makes them exciting today. Yes, Software’s weighted average operating margin is 23% compared to Industrials’ 17%, but that is only 35% higher compared to a price-to-sales ratio over 135% higher than the Industrials.
Follow the money
Consider also the direction of travel. The US government is spending $1.8 trillion in deficit every year. Trump wants the defence budget to go to $1.5 trillion. The hyperscalers are forecast to spend over $1.5 trillion in 2026 and 2027 combined. US utilities are forecast to spend over $1 trillion on the power grid over the next five years.
These are sums not seen in the last 20 years, which will go to asset heavy businesses that can build rather than asset light software budgets. We need a new map to understand this new world of higher rates, higher inflation and higher spending.
This spending ends up in the backlogs of Industrials. Backlogs convert to sales, producing faster earnings growth and expanding margins that should mean those sales are valued more highly.
A new industrial revolution
If SpaceX IPOs at its target $1.75 trillion valuation, it will make Elon Musk the world’s first trillionaire and the wealthiest human to ever exist adjusted for GDP. Currently, that title belongs to John D. Rockefeller who built an oil empire (one of the technological revolutions of the time) and for whom the government had to invent anti-monopoly law.
There is a symmetry to the idea that over 100 years after Rockefeller’s oil monopoly was broken up, Musk has just consolidated his tech conglomerate even further to spend on the new frontiers of space and AI.
When Musk tells us he wants to launch data centres into space, we should be thinking of the vast energy, steel and engineering this venture will take, not dream of which AI platform will win.
If we assume we are amid a third industrial revolution, which America is leading, the investment world starts looking very different – and the old maps that directed us well before look more clearly unfit for purpose.
Important Information
Past performance is not a guide to future performance; the value of an investment and income from it can go down as well as up. Your capital is at risk. Please read the Prospectus before making an investment.