Summary of Key Points
On June 1st, the previously surging optical communications sector (especially CPO co-packaged optics) experienced a collective slump, with many popular leading stocks hitting daily limit-downs or experiencing significant declines. In contrast, sectors that had been sluggish earlier, such as coal and software, saw sharp gains, indicating a clear shift in market momentum from high-priced technology stocks to lower-risk sectors. Industry experts believe that the decline in the tech sector was due to short-term fear of overvaluation caused by crowded trading conditions, although the fundamental fundamentals driven by AI remain unchanged. The rise in the lower-risk sectors is attributed to their lower valuations and higher safety margins.
There is disagreement about whether this represents a complete shift in market preferences, but most experts agree that the tech sector still has potential for recovery after a short-term adjustment. The core reason for the current market divergence lies in the significant differences in company performance. The investment logic for the AI industry chain has shifted from speculative hype to a focus on real profit generation driven by supply and demand imbalances.
1. Sharp Decline in Optical Communications Sector
The sharp drop in the optical communications sector was not due to a decline in the industry's health but rather because the gains were too rapid, leading investors to fear taking the final plunge and sell their positions.
- How extreme were the gains? For example, Changyingtong's stock price nearly tripled in 18 days, reaching a new historical high in May; Yunnan Germanium rose by 215% from its February low to its May peak; Zhongji Xuchuang's total market value exceeded one trillion yuan, making it the first AI optical module company to reach this milestone. These stocks all reached their highest prices in May.
- Why the decline? According to industry statistics, the institutional holding ratio in the broader tech sector has reached a historic high of 40%, leading to extremely crowded trading conditions. Any sale by institutional investors can trigger a chain reaction, causing stock prices to plummet. Additionally, valuations have been pushed close to historical extremes, exacerbating investor fear of overvaluation and prompting profit-taking.
- Fundamentals remain strong: AI models require large amounts of data transmission, so the demand for optical communications is still robust. Private equity investors argue that this is merely a natural market adjustment and not an indication of a weakening industry.
2. Rise in Lower-Risk Sectors
In contrast to the decline in the optical communications sector, sectors such as coal, software, and banking saw sharp gains due to their attractive valuations and lower risks.
- Coal sector: The index rose by 6.42% on June 1st, with nearly 10 stocks hitting daily limit-ups. Coal stocks had been declining for a long time and were trading at low valuations; energy demand is stable, making them relatively safe investments.
- Software and defensive sectors: The software index rose by 3.66%, and banks and real estate also saw gains. These sectors had not seen significant price increases earlier, so their stocks were less affected by market volatility. Investors seeking lower-risk opportunities moved from tech stocks to these sectors.
- Essentially, it's a shift in market focus: Investors are moving from high-risk, overvalued sectors to lower-risk, more stable ones.
3. Will the Tech Sector Cool Down?
There is no consensus on whether the tech sector will continue to perform poorly in the long term, but most experts believe it will not experience a prolonged downturn.
- Short-term adjustment is expected: Private equity investors see this pullback as a market correction for extreme valuation disparities and do not expect a panic sell-off. The trend of AI infrastructure development (such as demand for computing power and optical fibers) remains strong, and the fundamentals are unchanged.
- Wait for mid-year reports to confirm: Investors are awaiting mid-year reports to assess whether tech companies' profits can justify their current valuations. If performance is satisfactory, funds may return to these stocks; otherwise, further adjustments may be necessary.
- Differences in perspectives: Some believe that AI is a long-term trend and will continue to drive growth despite short-term fluctuations. Others expect the macroeconomic recovery to boost sectors like consumption and real estate, leading to a more balanced market with multiple growth drivers.
4. Root of Market Divergence: Vast Performance Differences
The main reason for the current market divergence is the significant difference in company performance.
- Data from Huachuang Securities shows that the top-performing sectors (communications, electronics, machinery) had average net profit growth of 15.1% in the first quarter of 2026, while the bottom-performing sectors (beauty and wellness, food and beverages) had a negative growth rate of -29.6%. This indicates that market gains are not based on speculative hype but on actual business performance.
- Evidence of fundamental support: The optical communications sector, for example, is benefiting from increased AI demand, which is boosting company profits.
5. Change in AI Investment Logic
The approach to investing in AI has shifted from focusing on future prospects (e.g., the potential benefits of AI) to evaluating actual profit generation.
- Previously: Stock prices rose due to expectations of explosive AI demand, reflecting emotional market sentiment.
- Currently: The focus is on supply and demand imbalances. The supply of essential components (computing power, chips, optical fibers) cannot keep up with demand, leading to price increases and real profit growth for related companies. Investing in AI now requires a focus on these tangible factors rather than mere speculation.
Conclusion
The recent market fluctuations represent a temporary shift in investor preferences. While the tech sector is adjusting after rapid gains, its long-term prospects remain strong. Lower-risk sectors are attracting investors due to their lower valuations and stability. The key will be the performance of companies in the coming months—whether tech stocks can deliver the expected profits and whether lower-risk sectors can improve their fundamentals. For individual investors, it is advisable to avoid chasing high-priced, speculative stocks and instead focus on companies with solid financial foundations.