Investors are looking further down the AI data-center supply chain for signs of demand amid concerns of a spending slowdown, one expert says

Lumentum's stock was Wednesday's best-performing S&P 500 component.

The Federal Reserve was no match for shares of optical-networking companies, which led S&P 500 gainers on Wednesday in the face of broad market weakness.

Shares of Lumentum Holdings and Coherent closed up 9.6% and 6.9%, respectively. At minimum, the moves could be interpreted as part of a rebound from Monday's selloff, which was fueled by concerns of a possible artificial-intelligence spending slowdown.

But some experts say they could also be a statement on which pockets of the AI-hardware sector investors deem resilient.

"Traders are tying themselves to parts of the supply chain where demand is tangible, and they're favoring areas where spending is committed," said Jake Behan, head of capital markets at Direxion.

Hardware makers further down the AI data-center supply chain are good indicators of underlying AI-infrastructure demand, said Joseph DeYonker, the CEO of PurePlay ETFs. Those companies are "where actual deployment of AI systems translates into demand for networking, servers and other physical infrastructure," he noted.

Investors in the AI trade are becoming more selective and looking for parts of the ecosystem that are seeing orders and capacity additions, DeYonker told MarketWatch.

"Optical connectivity is an interesting area because as AI clusters become larger, the amount of data moving between GPUs and across data centers continues to increase," DeYonker said in emailed comments, referring to systems of several graphics processing units or custom AI chips connected together to form a more powerful chip.

Lumentum and other optical suppliers are therefore becoming increasingly crucial to the data-center build-out. However, DeYonker said optical stocks could see more volatility as expectations grow.

Paul Meeks, head of technology research at Freedom Capital Markets, said Wednesday's action was "a snapback" after the concerns about slower AI-model development. He expects spending on AI infrastructure to continue - but added that such stocks could see choppy trading in the coming months, as the data-center build-out has become a topic of concern for voters in this year's midterm elections.

"Data centers are very large, sophisticated commercial real-estate projects, and like any multibillion-dollar project, there will be inevitable delay," Meeks said.

Yet more supply of data-center infrastructure is slated to come online starting next year and beyond, which is expected to be a driver of the AI trade.

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Micron Technology's (MU) earnings results, expected later this month, will give the market "a really pure read on infrastructure demand," Direxion's Behan said, noting that the company is going into its report with less than half of its data-center requests fulfilled.

"If they can hold that backlog demand in their guidance, that's a very powerful rebuttal to any slowdown narrative near term," he said, referring to the company's forecast.

Meanwhile, the Federal Reserve raised interest rates by a quarter point Wednesday, and said it expects at least one more hike down the road. The S&P 500 SPX turned lower during Fed Chair Kevin Warsh's press conference and finished the day down 0.4%.

PurePlay's DeYonker offered that higher rates could pressure the valuations of fast-growing tech stocks. However, "there is still a substantial amount of physical infrastructure that needs to be built to support the next generation of AI," he said.