Optical stocks surge again as hedge funds revive AI momentum trade

Optical component stocks are once again emerging as a favoured momentum trade as investors regain confidence in the scale of artificial intelligence spending by the world’s biggest technology companies, according to a report by Bloomberg.
Applied Optoelectronics, Lumentum, Coherent, Fabrinet and Corning have all gained more than 25% since late July, with Applied Optoelectronics jumping more than 80% in just 10 trading sessions and Coherent climbing 61%.
The renewed rally has been driven by expectations that Microsoft, Alphabet, Amazon and Meta will continue spending heavily on data centres and AI infrastructure, supporting demand for the optical equipment required to move enormous volumes of data.
Optical technology uses light rather than traditional copper connections to transmit data more rapidly and efficiently. That makes optical components increasingly important as hyperscalers expand data-centre capacity to support AI workloads.
The latest gains accelerated after Lumentum reported quarterly results and issued a first-quarter outlook that exceeded analyst expectations. Its shares jumped 16%, while Coherent gained 9%, Fabrinet rose 11% and Applied Optoelectronics and Corning each advanced about 5%.
The sector had already been one of the market’s biggest AI winners earlier in 2026. Between the start of the year and mid-May, Corning, Lumentum and Coherent each more than doubled, while Applied Optoelectronics surged 446%.
That rally subsequently stalled as investors became concerned that the enormous capital expenditure plans underpinning the AI boom might prove difficult to sustain. Semiconductor stocks were among the first areas to weaken before the caution spread across the wider technology sector through July.
Sentiment has since reversed as major technology companies reported strong cloud businesses and reaffirmed their commitment to AI infrastructure spending. For optical stocks, expectations for hyperscaler capital expenditure are increasingly outweighing company-specific earnings considerations.
A potential US restriction on Chinese data-centre components has added another catalyst. A report last week said the Federal Communications Commission was considering restrictions on imports of certain Chinese equipment, including some optical transceivers. If implemented, the measures could direct additional demand towards US-based suppliers.
The combination of strong AI demand and constrained supply has helped reinforce the sector’s bottleneck status, although that also leaves the stocks vulnerable to sharp reversals if supply conditions improve or spending expectations weaken.
Industry demand is expected to accelerate further in 2027. Applied Optoelectronics increased revenue by more than 80% last year, with analysts expecting growth of about 130% in 2026 and 174% next year.
Lumentum has gained 158% in 2026 after reporting stronger-than-expected fiscal fourth-quarter results and issuing an upbeat forecast. Coherent is up more than 90%, while Cisco, another supplier of optical networking technology, has risen around 60%.
Such gains have pushed valuations well beyond historical norms. Lumentum trades at roughly 41 times projected earnings, compared with an average multiple of about 19 over the past decade. Coherent and Fabrinet are also trading at substantial premiums to their longer-term valuations.
The market is increasingly looking beyond the immediate earnings outlook, however, towards the potential impact of the next generation of AI infrastructure.
Nvidia has committed $2bn each to Lumentum and Coherent as part of its efforts to advance silicon photonics. The shift towards optical connectivity and away from copper could provide a significant long-term growth opportunity as AI systems become increasingly dependent on high-speed data transmission.
The biggest gains may not arrive until 2027 and beyond, meaning investors could face considerable volatility in the meantime.