Core Insights - Wall Street experienced a mixed start to 2026, with the S&P 500 rising 0.2%, the Dow Jones Industrial Average increasing by 0.7%, while the Nasdaq fell by 0.3%. The small-cap Russell 2000 index outperformed with a 1.1% gain [2] Small-Cap Stocks Outlook - The early strength in small-cap stocks may signal the potential return of the "January Effect," where smaller companies' stock prices typically rise more in January due to year-end tax-loss selling [3] - Several macroeconomic factors are expected to support small-cap stocks in 2026, beyond the January seasonal pattern [5] Catalysts for Small-Cap Rally - **Favorable Macroeconomic Outlook**: Easing interest rates are anticipated to enhance small-cap stock performance, with Goldman Sachs highlighting compelling opportunities driven by expected rate cuts and accelerating earnings [6] - **Attractive Relative Valuations**: U.S. small caps are trading at a 26% discount to large caps, near historic lows, while international small caps are at an 8% discount despite higher forward earnings growth [7] - **Domestic Economic Advantages**: Small-cap companies benefit more from domestic revenue sources, positioning them favorably amid trends like reshoring and infrastructure development [8] - **AI as a Beneficiary**: Small caps may gain disproportionately from AI-driven productivity improvements, leading to larger percentage earnings growth compared to large caps [9] - **Increased Market Activity**: A rise in mergers and acquisitions (M&A) and a recovering IPO market in 2026 could create significant returns and validate small-cap valuations [10] Investment Strategy: ETFs vs. Individual Stocks - Investors may prefer small-cap ETFs for exposure due to the diversification they offer across over 2,000 companies, mitigating risks associated with individual stocks [11][12] Recommended Small-Cap ETFs - **Vanguard Russell 2000 ETF (VTWO)**: Offers exposure to 1,989 U.S. small-cap stocks, with a 12.2% increase over the past year and net assets of $13.7 billion [14][15] - **iShares Russell 2000 ETF (IWM)**: Provides exposure to 1,959 small public U.S. companies, gaining 12% over the past year with net assets of $74.42 billion [16][17] - **Vanguard Small-Cap ETF (VB)**: Covers 1,331 small-cap companies, with an 8.8% rise over the past year and net assets of $68.9 billion [18][19]

Core Insights - The iShares Russell 2000 Growth ETF (IWO) focuses on over 1,000 small-cap growth stocks, while the Vanguard Mega Cap Growth ETF (MGK) concentrates on just 69 mega-cap stocks, primarily in the technology sector [1][2][4][5] Fund Characteristics - IWO has sector weights of 25% in technology, 22% in healthcare, and 21% in industrials, with top holdings like Credo Technology Group, Bloom Energy, and Fabrinet each accounting for just over 1% of assets [1] - MGK has a striking 71% allocation to technology, with top holdings including Apple, NVIDIA, and Microsoft, which collectively make up over a third of the fund [2][5] Performance and Risk - MGK has delivered stronger five-year returns and shallower drawdowns compared to IWO, but its heavy tilt towards technology makes it vulnerable to sector downturns [5][7][8] - IWO offers greater diversification, which can cushion against downturns in specific sectors, but it carries higher risk due to its focus on small-cap stocks [8] Cost and Fees - MGK is more affordable than IWO, with an expense ratio that is 0.17 percentage points lower, although IWO offers a slightly higher dividend yield [3][5] Investment Strategy - The choice between IWO and MGK depends on investor preferences for diversification versus concentration, with IWO appealing to those seeking broader exposure and MGK to those favoring established tech giants [4][8]

Core Insights - In 2026, investors are expected to prioritize companies with consistent earnings growth, as this indicates profitability, but earnings acceleration is even more critical for driving stock prices higher [1][8] - Research shows that top-performing stocks often experience earnings acceleration before their share prices rise [1] Earnings Acceleration - Earnings acceleration refers to the incremental growth in a company's earnings per share (EPS), specifically when the quarter-over-quarter earnings growth rate increases over time [2] - This metric helps identify stocks that have not yet attracted investor attention, which can lead to a price rally once they are recognized [3] Earnings Growth Trends - An increasing percentage of earnings growth suggests a company is fundamentally sound, while a stagnant or decelerating growth percentage may indicate consolidation or a slowdown, potentially dragging prices down [4] Screening Parameters - Stocks should be screened based on the last two quarter-over-quarter EPS growth rates exceeding previous periods' growth rates, with projected EPS growth rates for the upcoming quarter expected to surpass prior periods [5][6] - Additional criteria include a current price of at least $5 and an average 20-day trading volume of 50,000 or more to ensure adequate liquidity [7] Top Stocks Identified - Screening for accelerating EPS growth narrowed the universe of approximately 7,735 stocks to just 11, with Silicon Laboratories Inc. (SLAB), Patria Investments Limited (PAX), and Fabrinet (FN) leading the list [8] - Expected earnings growth rates for 2026 are 197.8% for SLAB, 22.8% for PAX, and 16.1% for FN [8][9][10][11]

Core Insights - The SPDR S&P 500 ETF Trust (SPY) and the iShares Russell 2000 ETF (IWM) serve distinct purposes in a diversified investment strategy, with SPY focusing on large-cap U.S. companies and IWM on small-cap domestic stocks [1][2] Cost & Size Comparison - SPY has a lower expense ratio of 0.09% compared to IWM's 0.19%, making it more attractive for fee-conscious investors [3] - As of December 31, 2025, SPY has a one-year return of 16.57% while IWM's is 12.04% [3] - SPY also offers a slightly higher dividend yield of 1.06% compared to IWM's 0.97% [3] - SPY has significantly higher assets under management (AUM) at $701 billion versus IWM's $72 billion [3] Performance & Risk Comparison - Over the past five years, SPY has shown stronger cumulative growth, with a growth of $1,843 from an initial investment of $1,000, compared to IWM's $1,259 [4] - SPY has a max drawdown of -24.50%, while IWM's max drawdown is -31.91%, indicating that SPY has experienced shallower losses during downturns [4] - IWM has a higher beta of 1.30 compared to SPY's beta of 1.00, reflecting greater volatility associated with small-cap stocks [3][4] Holdings Composition - SPY tracks the S&P 500 Index, holding 503 large-cap U.S. stocks, with a significant sector tilt towards technology (35%), financial services (13%), and communication services (11%) [5] - The top three holdings in SPY—Nvidia, Apple, and Microsoft—account for over 20% of its assets [5] - IWM, on the other hand, holds 1,961 small-cap stocks, with no single stock dominating its portfolio; its largest sectors are healthcare, financial services, and technology [6] - The top holdings in IWM—Credo Technology Group, Bloom Energy, and Fabrinet—represent less than 3% of total assets [6] Investment Implications - Large-cap stocks, represented by SPY, tend to be more stable during market volatility, while small-cap stocks, represented by IWM, can offer greater potential for explosive growth but come with higher volatility [8][9] - The recent performance of large companies, such as Nvidia, has led to SPY outperforming IWM in both 12-month and five-year total returns [10] - Investing in both large-cap and small-cap segments can help diversify a portfolio, although small-cap stocks may be more susceptible to price fluctuations [11]

Investment Rating - The industry investment rating is "Outperform the Market - A" and the rating is maintained [7] Core Insights - NVIDIA is leading the transition of AI interconnect from scale-up and scale-out to scale-across, introducing Spectrum-XGS Ethernet scalable technology to unify distributed data centers into a gigabit-level AI super factory, establishing a new generation of AI infrastructure [12][13] - The North American cloud service provider (CSP) demand is strong, with an expected acceleration in prosperity from 2026 to 2028, as large-scale CSPs are dominating the construction of AI scale-across backbone networks [3][14] - The construction of cross-data center interconnect infrastructure is expected to benefit first, with long-term positive implications for the upstream optical communication sector [4][15] Summary by Sections Industry Performance - The computer sector has outperformed the Shanghai Composite Index by 1.01% this week, with a weekly increase of 2.89% and a year-to-date increase of 25.74% [16][17] Market Outlook - The report indicates that the interconnection of data centers has become a new competitive direction for North American CSPs, with significant revenue potential from projects like DCOM in collaboration with Meta, expected to reach hundreds of millions of dollars by 2026 [3][14] Key Recommendations - Focus on companies involved in cross-data center interconnect infrastructure, including coherent optical modules (Ciena, Cisco, etc.), switches (Arista, Cisco), and reconfigurable line systems (Ciena) [4][15]

Core Insights - The Meridian Hedged Equity Fund reported a return of 1.67% in Q3 2025, underperforming the S&P 500 Index which returned 8.13% and the CBOE S&P 500 BuyWrite Index which returned 3.53% [1] - The fund's performance was influenced by a market focus on policy easing rather than weakening fundamentals, despite concerns about stagflation [1] Company Highlights - Intercontinental Exchange, Inc. (NYSE:ICE) is highlighted as a key stock in the fund's portfolio, with a one-month return of 3.84% and a 52-week gain of 7.64% [2] - As of December 23, 2025, Intercontinental Exchange, Inc. had a stock price of $161.95 and a market capitalization of $92.704 billion [2] - The company operates a global network of exchanges and data services across various asset classes, benefiting from a resilient business model that combines transaction-based revenues with recurring data and technology revenues [3] Investment Sentiment - Despite the underperformance of Intercontinental Exchange, Inc. in the recent quarter, the fund maintains confidence in its long-term potential due to strong cash flow generation for debt reduction and shareholder returns [3] - The company is not among the top 30 most popular stocks among hedge funds, with 82 hedge fund portfolios holding its stock at the end of Q3 2025, a slight decrease from 84 in the previous quarter [4] - The fund suggests that certain AI stocks may offer greater upside potential compared to Intercontinental Exchange, Inc., indicating a competitive investment landscape [4]

Summary of Optical Transceiver Industry Conference Call Industry Overview - The optical transceiver market is poised for multi-year Total Addressable Market (TAM) expansion driven by AI training and inference clusters, leading to faster port-speed upgrades and increased optical content per data center buildout [5][8][10] - Traditional data centers experienced networking speed doubling every 3-4 years, but AI is compressing upgrade cycles to every 2 years, resulting in a higher cadence of refresh and deployment across 400G, 800G, and 1.6T generations [8][10] Key Market Drivers - **Structural Drivers**: 1. Accelerated networking bandwidth upgrade cycles 2. Rising optical link density as more XPUs are deployed and networks scale across distances [10] - **Bandwidth Demand**: - Aggregate bandwidth demand is expected to grow significantly, with projections of 51,000-59,500 Pb/s by 2027 [9] - The equivalent transceiver quantity is forecasted to reach 220-253 million for 400G transceivers by 2027 [9] Market Segmentation - **Scale-Out**: Hyperscalers and cloud providers are increasing the number of GPU servers, which raises the number of server-to-switch and switch-to-switch links, expanding the TAM [18] - **Scale-Across**: Longer-reach back-end networks connecting GPU clusters across distances are adding new optical demand, with major hyperscalers already engaged in projects [19] - **Scale-Up**: High-bandwidth, ultra-low-latency interconnects within a single compute domain are expected to grow, with Co-Packaged Optics (CPO) becoming increasingly important [20] Investment Opportunities - **Coherent Plugables**: A multi-year investment theme as hyperscalers push AI-era fabrics beyond single buildings, enabling higher-order modulation and better fiber utilization [25] - **Component Suppliers**: Companies like Lumentum, Tower Semiconductor, and Applied Optoelectronics are highlighted as key beneficiaries due to their roles in the optical component supply chain [6][49][52] Company Highlights - **Ciena**: Focused on coherent optics for scale-out and scale-across architectures, integrating ZR plugables with its systems [28] - **Fabrinet**: Positioned as a second-derivative play in the optical transceiver ramp, benefiting from the overall growth in optics volumes [33] - **Cisco/Acacia**: Robust demand for plugable optics, with significant orders from major hyperscalers [35] - **Lumentum**: Strong growth potential in optics, with a focus on components that carry higher margins [45] - **Tower Semiconductor**: Expected to benefit from the EML shortage and SiPho ramps, with a significant market share in SiPho wafers [49][51] - **Applied Optoelectronics**: Vertically integrated with U.S.-based manufacturing, appealing to hyperscalers seeking to reduce reliance on Chinese supply chains [52] Financial Metrics - **Optical Transceiver Industry Comparables**: - Lumentum (Market Cap: $22.7 billion, P/E: 45.5x) - Coherent (Market Cap: $26.8 billion, P/E: 29.9x) - Applied Optoelectronics (Market Cap: $1.9 billion, P/E: 57.4x) [7] Conclusion - The optical transceiver market is experiencing significant growth driven by technological advancements and increased demand from hyperscalers and cloud providers. Companies positioned within this ecosystem, particularly those focusing on coherent optics and optical components, are expected to benefit substantially from these trends.

Core Viewpoint - Fabrinet (NYSE:FN) is highlighted as a promising investment in the AI sector, with a "Positive" rating and a price target of $550 set by Susquehanna, indicating strong potential in the optical networking market driven by infrastructure and AI trends [1][3]. Group 1: Company Positioning - Fabrinet is well-positioned in the optical networking market, benefiting from the growth in transceivers, Data Center Interconnect (DCI), and Co-Packaged Optics (CPO) technologies [2][3]. - The company has significantly benefited from the increasing demand for transceivers in data centers and is expected to capitalize on further opportunities in optical networking and high-performance computing (HPC) contract manufacturing for AI servers [3]. Group 2: Market Outlook - The firm anticipates that Fabrinet will leverage expanding opportunities in optical networking, which includes various technologies that are critical for the growth of AI infrastructure [2][3].

J P M O R G A N North America Equity Research 15 December 2025 IT Hardware/ Telecom & Networking Equipment Samik Chatterjee, CFA AC (1-212) 622-0798 samik.x.chatterjee@jpmorgan.com Joseph Cardoso (1-212) 622-9036 joseph.cardoso@jpmchase.com Manmohanpreet Singh (1-212) 622-4527 manmohanpreet.singh@jpmchase.com Hardware & Networking Cloud Capex Outlook: Growth to Exit '25 at +65%; '26 Growth Expectations Now Tracking to 50%+ Data center capex among the Top 4 U.S. CSPs continues to trend higher for 2025 follow ...

Core Thesis - Fabrinet (FN) is positioned as a leading outsourced semiconductor assembly and test (OSAT) provider, focusing on photonic modules for AI data centers, indicating strong growth potential in the AI hardware supply chain [2][3] Financial Performance - As of December 16th, FN's share price was $451.16, with a trailing P/E of 48.46 [1] - The company is projected to achieve a revenue growth of 27.9% and EBITDA growth of 30.9% in FY26, driven by the increasing adoption of photonic transceivers [2] - FN's net income margin stands at 10.7%, reflecting the profitability of its specialized operations [3] Market Valuation - FN's stock trades at a forward EV/Sales of 3.8x, EV/EBITDA of 30.5x, and a forward P/E of 36.7x, suggesting that the market valuation may not fully reflect its strategic position in the AI infrastructure ecosystem [3] Competitive Advantage - The company's focus on high-reliability modules provides a competitive moat, as few competitors possess the necessary technical expertise or scale to serve hyperscale AI clients [3] Growth Catalysts - Potential catalysts for FN's upside include growth in high-margin photonic modules, deeper penetration into AI data center supply chains, and operational leverage that could enhance profitability [4] - The company is well-positioned to benefit from revenue and margin expansion as AI adoption accelerates and demand for photonic interconnects increases [3][4] Historical Context - FN's stock has appreciated approximately 126.71% since a previous bullish thesis in April 2025, which highlighted a strategic issuance of warrants to Amazon, indicating growing market confidence in AI and data center demand [5]