JPMorgan Ups Datacom Outlook, Bullish for Optical Suppliers

JPMorgan announced on 16 May 2026 a revised upward outlook for the datacom market, citing stronger-than-expected demand for optical components. The investment bank's analysis points to accelerating capital expenditure from cloud service providers and enterprises as the primary catalyst. This reassessment signals a positive environment for key optical suppliers like Coherent and Lumentum, which provide the essential lasers and transceivers for data centers. The firm's revised forecast anticipates datacom market growth exceeding previous estimates by several percentage points.

Why Datacom Demand Is Accelerating

The increased outlook is driven by a surge in capital investment from hyperscale cloud companies. These firms are expanding their global data center footprints to support artificial intelligence workloads and general cloud computing growth. Capital expenditure for the top four cloud providers is projected to increase by over 20% year-over-year in 2026. This infrastructure build-out requires massive quantities of high-speed optical components to connect servers and storage systems within and between data centers.

Enterprise network upgrades are contributing to the demand cycle. Companies are modernizing their internal networks to handle increased data traffic from hybrid work models and digital transformation initiatives. Demand for 400-gigabit and 800-gigabit optical transceivers is particularly strong. JPMorgan analysts noted order visibility from enterprise clients has improved significantly in the second quarter.

Which Optical Suppliers Benefit Directly

Coherent Corp. is a primary beneficiary, given its strong market position in indium phosphide and silicon photonics components. The company supplies key lasers and receivers used in high-speed datacom transceivers. Coherent's datacom segment revenue, which constitutes approximately 35% of its total sales, is expected to see accelerated growth through the second half of 2026.

Lumentum Holdings is another major player poised to gain from the trend. The company's portfolio includes high-performance optical chips and modules essential for data center interconnects. Lumentum's recent product launches targeting 800-gigabit applications position it to capture market share. A potential risk for both companies is the cyclical nature of the semiconductor industry, which could lead to supply constraints and extended lead times for certain components.

How This Differs from Previous Cycles

The current demand cycle is distinguished by the specific requirements of AI clusters. AI training and inference workloads necessitate extremely low-latency, high-bandwidth connections between GPUs, creating a specialized market for advanced optical products. This contrasts with the more generalized demand seen in previous cloud expansion cycles focused on storage and web hosting.

The speed of adoption is also faster. The transition to 800-gigabit technology is occurring at a quicker pace than the prior shift from 100-gigabit to 400-gigabit. This compression of the product lifecycle could benefit suppliers with strong research and development capabilities. JPMorgan estimates that 800-gigabit transceiver shipments will grow at a compound annual growth rate of more than 40% from 2025 to 2028.

What is the datacom market?

The datacom, or data communications, market encompasses the hardware and software used to transmit digital data between computers and networks. This includes optical transceivers, switches, and routers that form the backbone of data centers and enterprise networks. The market is distinct from the telecom sector, which focuses on long-distance communication infrastructure.

Why are optical components critical for AI data centers?

AI data centers require immense bandwidth to connect thousands of processors working in parallel. Optical components using light to transmit data provide the high speed and low latency necessary for these connections. Copper-based alternatives are insufficient for the distances and data rates needed in modern AI cluster architectures, making optical technology essential.

Bottom Line

JPMorgan's revised outlook signals a sustained growth phase for optical component suppliers driven by AI and cloud expansion.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.