AI Stocks Hit Reset. Why Optical Plays Are Hot.

• The optical datacom market is forecast to more than double from $17 billion in 2025 to $36 billion in 2028, with Morgan Stanley predicting the overall optical market will reach $65 billion by 2028 from $30 billion in 2025.
• Major AI stocks have retreated in 2026: Nvidia down 5%, Snowflake down 23%, Oracle down 25%, Salesforce down 26%, and Palantir down 23%, as investors question the longevity of the AI business cycle and sustainability of capital spending growth.
• Software companies face a 'SaaS-pocalypse' threat as AI model builders like OpenAI and Anthropic emerge as potential competitors, with new outcome-based pricing models like Salesforce's 'agent work units' replacing traditional per-seat business models.

Market Summary: AI Stocks Undergo Rotation as Optical Networking Emerges

Key Developments

AI stocks faced significant volatility following a critical report from Citrini Research, triggering a rotation away from traditional AI plays. Software AI stocks were particularly hard hit, with concerns mounting over potential industry disruption and the emergence of AI model builders as competitors.

Optical Networking Surge

Optical networking stocks emerged as bright spots, with Lumentum Holdings (+90% in 2026), Ciena (+49%), Applied Optoelectronics, and Viavi Solutions leading gains. The surge reflects growing demand for optical solutions to connect thousands of servers in data centers with minimal latency. LightCounting forecasts the optical datacom market will reach $36 billion by 2028 from $17 billion in 2025, while Morgan Stanley predicts the overall optical market will hit $65 billion by 2028.

Hyperscaler Spending

Cloud computing giants (Google, Amazon, Meta, Microsoft) are expected to spend $645 billion in 2026, representing 56% growth or $230 billion increase from 2025.

Performance Scorecard

Notable 2026 performance includes Vertiv Holdings (+57%), Lumentum (+90%), and Ciena (+49%) in positive territory, while Salesforce (-26%), Oracle (-25%), and Snowflake (-23%) declined significantly. Nvidia dropped 5% despite beating earnings expectations on February 25.

Market Concerns

Key worries include the "SaaS-pocalypse" phenomenon, where AI agents could replace traditional software companies, mounting competition for Nvidia from Google TPUs and Amazon Trainium chips, Block slashing 40% of workforce, and data center infrastructure debt levels. OpenAI secured major funding from Amazon, Softbank, and Nvidia, with Microsoft maintaining a 27% stake.