The high profitability certainty of leading stocks in the optical communication sector, whose fundamentals and industry outlook remain unchanged, makes a rapid unwinding of their concentrated holdings unlikely. The market may be awaiting interim financial reports to validate the earnings strength of tech stocks during a rotation between high and low valuation segments.
Following an extremely divergent performance in May, the previously surging optical communication sector suffered a significant setback on June 1st. By the market close, the CPO (Co-Packaged Optics) concept index had fallen 4.4%, with popular leading stocks generally experiencing substantial declines. Cig Shanghai Co.,Ltd. and Hangzhou Cable Co.,Ltd. hit the daily downside limit, while Everprox Technologies Co.,Ltd. and other stocks dropped over 11%.
In stark contrast to the sharp decline in the optical communication sector, previously underperforming low-position sectors like coal and software saw collective surges, indicating a clear flow of market funds from high-flying tech stocks to lower-priced segments.
Private fund managers interviewed suggest that as trading concentration and valuations in the tech sector approach historical extremes, anxiety over "high prices" among investors is amplifying, pushing the market into a self-adjustment phase. However, given that the fundamentals and industry outlook for optical communications remain solid, the concentrated holdings in leading stocks with high earnings certainty are unlikely to unravel quickly. The market may be in a phase of rotation between high and low valuation sectors, awaiting the interim financial reports to confirm the profit momentum of technology companies.
Sharp Decline Across the Optical Communication Sector
On June 1st, the optical communication sector experienced a collective plunge, with a continuous stream of sell orders leading to widespread losses across the board. Several leading stocks that had seen massive gains earlier plummeted sharply.
By the close, Hubei Doti Micro Technology Co.,Ltd. tumbled 14.9%, while other stocks fell over 13%. Suzhou Dongshan Precision Manufacturing Co.,Ltd., Yunnan Lincang Xinyuan Germanium Industry Co.,Ltd., Universal Scientific Industrial(Shanghai)Co.,Ltd., Cig Shanghai Co.,Ltd., and Hangzhou Cable Co.,Ltd. all hit the daily limit down.
Nearly all the optical module stocks that fell sharply on June 1st had reached their historical highs just in May. Suzhou Dongshan Precision Manufacturing Co.,Ltd. touched an intraday high of 234 yuan on May 27th, having doubled in value from April to May. Yunnan Lincang Xinyuan Germanium Industry Co.,Ltd.'s rally was even more dramatic, soaring from a February low of 33.31 yuan to a record high of 105.17 yuan on May 14th, representing a maximum gain of 215.73% during that period.
Amid the broad decline, the performance of Yangtze Optical Electronic Co.,Ltd. was particularly notable. It closed down 9.27% on June 1st. The company's share price had hit a historical intraday high of 186.16 yuan on May 29th, soaring nearly 200% over just 18 trading days, making it the top gainer across the entire market for that month.
The frenzied speculation around Yangtze Optical Electronic Co.,Ltd. was primarily driven by the immense demand for fiber optic infrastructure stemming from the development of large AI models. As AI computing power continues to escalate, the need for high-speed interconnections between data centers is growing exponentially. Fiber optics, as the core medium for data transmission, has seen its market potential significantly expanded. Yangtze Optical Electronic Co.,Ltd.'s specialty optical fibers and fiber optic loop products, widely used in data centers, 5G communications, and aerospace, are viewed by the market as a core beneficiary of AI infrastructure build-out.
However, this expectation-driven speculation also led to a sharp increase in sector trading concentration. According to institutional statistics, institutional holdings in the broad technology sector reached around 40% in the first quarter of 2026, a historically high level. Since entering the second quarter, the continued rise of the STAR 50 and ChiNext indices, coupled with the strong profit-making effect in the AI tech sector, has attracted a massive influx of capital.
In late May, the total market capitalization of leading optical module maker Zhongji Innolight Co.,Ltd. broke through the trillion-yuan mark, becoming the first company in the AI optical module industry chain to achieve this milestone. This also signaled that the divergence between the AI tech sector and non-tech sectors had reached an extreme level. Market concerns have grown widespread about whether the AI tech sector has become overheated in the short term and whether the gap between valuations and fundamentals has grown too wide.
In a recent research report, Guojin Securities pointed out that the relative performance of the TMT sector compared to the CSI Dividend Index has surpassed the levels seen in early 2026. However, the current valuation dispersion is not extreme, suggesting that the profit momentum of the TMT sector remains a key support for the divergence. The institution believes that the future evolution of market style will depend primarily on the direction of corporate earnings fundamentals and the strength of profit diffusion, rather than factors like interest rates. For investors looking to position in the tech sector, the focus should be on the fundamental transmission logic; merely chasing thematic rotations is not advisable.
Low-Position Sectors Surge, Sparking Debate on Market Rotation
Beyond the optical communication sector, the semiconductor sector, another hot area in May, also fell sharply on June 1st, with the China Semiconductor Chip Index and the STAR 50 Index both plunging over a certain percentage. Chip stocks led the sector's decline.
While the two major tech sectors declined broadly, previously underperforming low-position sectors like coal and software services staged a counter-trend rally. By the close on June 1st, the coal index surged 6.42%, with nearly ten coal stocks, including Yankuang Energy Group Company Limited, Henan Dayou Energy Co.,Ltd., and Zhengzhou Coal Industry&Electric Power Co.,Ltd., hitting the daily upside limit. Simultaneously, the CSI Software Index rose 3.66%, and the AIPC concept strengthened significantly. Additionally, defensive sectors like banking, real estate, and securities posted gains of varying degrees, becoming "safe havens" for market funds.
This market dynamic of "high-flyers falling, low-priced stocks rising" has sparked widespread discussion about capital rotation. Some market analysts believe that after the previous substantial rally, valuations and trading concentration in the AI tech sector are near historical highs, creating significant short-term adjustment pressure. In contrast, low-position sectors like coal and banking have lower valuations and higher safety margins, attracting inflows of some risk-averse capital.
"From a microstructural perspective, the persistently rising trading concentration and valuation levels have prompted some investors to cash out of tech holdings. Concentration is a double-edged sword. On one side, it fuels rallies and pushes valuations to extremes during uptrends. On the other side, during downturns, it can easily trigger a 'sell-off cascade,' where selling pressure from some positions quickly spreads across the entire sector. Sectors like real estate, coal, and consumer staples, with lower valuations and relatively cleaner positioning, offer relative safety margins, attracting rotational capital flows," said the head of a Shanghai-based private fund.
In the view of this private fund manager, a "stampede" style sell-off in tech is unlikely in the short term. "We believe the correction in optical communications is primarily a spontaneous market correction, a realignment following the extreme divergence. The broad sector decline is also a manifestation of market consensus on both style allocation and trading levels. In reality, the trend and fundamentals of the AI infrastructure wave have not changed at all. We believe that as interim reports are gradually released, capital is expected to refocus on sectors with strong profit momentum and on sub-sectors where valuations have not been fully stretched," the fund manager added.
Regarding whether the market has entered a comprehensive phase of rotation from high to low valuations, opinions within the industry remain divided. Some argue that AI, as the core driver of the new technological revolution, will not change its long-term growth trajectory. Short-term adjustments are merely a normal consolidation within an uptrend, and laggard sectors like real estate and consumption offer more of a catch-up opportunity. Another view holds that as the macroeconomy gradually recovers and consumption and the property market bottom out, fundamentals are expected to improve, offering greater valuation repair potential for related sectors. Market style may shift from a single tech-driven narrative towards a more balanced, multi-theme development.
Huachuang Securities' research report also notes that the core driver behind the current high-low sector divergence is earnings differentiation. Since April, the divergence among A-share industries has continued to widen. Measured by the difference between the average rolling half-year performance of the top five and bottom five Shenwan primary industries, the divergence index has increased from 38% in early April to the current 61%, placing it at the 95th percentile level since 2010. Over the past six months, the top five performing industries were communications, electronics, machinery (automation equipment), building materials (glass/fiberglass), and non-ferrous metals, with an average gain of 47.4%. The bottom five were beauty & personal care, food & beverage, agriculture/forestry/animal husbandry/fishery, commercial retail, and non-bank financials, with an average loss of 13.1%.
Further analysis reveals that the top-performing industries generally have solid earnings support. Data shows that the average net profit growth rate (TTM) for the top five industries in the first quarter of 2026 was 15.1%. Although this is 2.0 percentage points lower than the third quarter of 2025, it is far above the -29.6% for the bottom five industries. This indicates that the current market's structural rally is not entirely driven by capital flows but is supported by a solid earnings foundation.
Regarding the future trajectory of the AI industry chain, Huachuang Securities believes the investment logic has undergone a fundamental shift. Previously, the market rally relied on concept-driven narratives and demand expectations, with stock prices reflecting sentiment premiums rather than real fundamentals. The core driver of the current rally has shifted to structural supply-demand gaps—the expansion speed of key links like computing power, chips, and energy infrastructure continues to lag behind the explosive demand growth. This has pushed the price levels of related products systematically higher, leading to a substantive improvement in corporate profitability. Therefore, investors should focus on subsequent changes in both supply and demand fundamentals within the AI industry chain.
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