Defying Rate Hike Headwinds: Lumentum and Coherent Surge as Investors Bet on Tangible AI Orders

The U.S. Federal Reserve's interest rate hike on Wednesday (16th) weighed on overall U.S. equities, yet optical communication giants Lumentum (LITE-US) and Coherent (COHR-US) surged, leading gains in the S&P 500. Lumentum closed up 9.6% and Coherent rose 6.9%, indicating investor optimism toward segments of the AI hardware industry with tangible, confirmed demand.

Jake Behan, Head of Capital Markets at Direxion, said: "Traders are allocating capital to parts of the supply chain where demand is real and verifiable. They favor areas where spending is already committed."

Optical communications has emerged as a key beneficiary in the AI data center space. Joseph DeYonker, CEO of PurePlay ETFs, noted that downstream hardware manufacturers in the AI data center supply chain serve as strong indicators of potential infrastructure demand. These companies, he said, are "where the actual deployment of AI systems translates into demand for networking equipment, servers, and other physical infrastructure."

DeYonker observed that AI-focused investors are becoming more selective, targeting parts of the ecosystem where actual orders and capacity expansions are visible. "Optical connectivity is a critical area to watch, as the volume of data transmitted between GPUs and across data centers continues to grow with expanding AI clusters," he explained.

This positions optical suppliers like Lumentum to play an increasingly vital role in data center expansion. However, DeYonker cautioned that as market expectations rise, optical communication stocks may face heightened volatility.

Considering AI hardware stocks had plunged earlier in the week after industry leaders like Anthropic called for a slowdown in development, some analysts view Wednesday's rally as a rebound. Paul Meeks, Head of Technology Research at Freedom Capital Markets, is among them. While he expects AI infrastructure spending to continue, he noted that data center construction has become a political issue ahead of the U.S. midterm elections, potentially leading to market volatility in the coming months.

"Data centers are massive, highly complex commercial real estate projects. Like any multi-billion-dollar initiative, delays are inevitable," Meeks said.

Nonetheless, a wave of new data center infrastructure is scheduled to come online starting next year and beyond, which is expected to serve as a major catalyst for AI-related investments.

Direxion's Behan highlighted that Micron's (MU-US) upcoming earnings report, due at the end of the month, will provide a "very clear read" on infrastructure demand. He noted that less than half of Micron's current data center demand has been fulfilled. "If they can maintain this level of backlog (confirmed but undelivered orders) in their guidance, it would be a strong rebuttal to any narrative of slowing AI spending."

DeYonker of PurePlay added that with the Fed raising rates by 25 basis points and signaling further hikes, rising interest rates could pressure valuations of fast-growing tech stocks. Nevertheless, he emphasized, "a significant amount of physical infrastructure required to support next-generation AI remains to be built."