What’s Changed/What’s New?
- Aggregate demand improving; 4Q finished ahead led by AI, Mil/Aero upside, moderately better Industrial and stable Auto.
- Bookings stepping up since Oct/Nov; B2B up to ~1.1x, extending backlog coverage and supporting strong 1Q setup.
- 2026 outlooks firming up. Some IP&E suppliers pushing MSD price increase on avg. across disti/direct tied to metals cost inflation.
- AI demand forecast still rising; connector industry demand projected ~2x in CY26, with some projecting doubling again in CY27.
Top 3 Channel Comments:
- Demand trends have improved since Oct and at CES, the sentiment from customers/disti was positive. We’ve seen a healthy concern from buyers around supply assurance, which is a good sign for suppliers. Buyers are a bit concerned about inflation and component price increases, but so far, they seem willing to pay. We are forecasting double-digit growth in 2026 sales.
- Interconnect B2B improved to ~1.1x in 4Q vs ~1.0 exiting 3Q, driven by strength in bookings, which continued into early January. Our backlog coverage for 1H26 has improved significantly over the last 3-4 months, and our focus has now shifted to filling in 2H orderbook. We are optimistic, forecasting sales to grow 10-12% in 2026, including the impact of AI.
- Nvidia and hyperscalers want to flatten the scale-out network from three-tier to two-tier while expanding the scale-up domain. This could push the first layer of scale-out out of reach for AECs. This shift is expected to begin with VR and extend into Kyber.
Other Key Takeaways:
- Demand improvement appears at least partly driven by increased customer focus on supply assurance amid signs of broader tightening across electronic components, including an uptick IP&E lead times as well as metal inflation impacting pricing.
- TPU CY26 forecasts up again to ~68–69K racks vs ~60K prior and <40K in CY25. Estimating TPU connector TAM +90% in CY26.
- CY26 Nvidia GB connector TAM projected ~60K racks (upside ~80K). VR volumes incremental, with shipments beginning 3Q26.
- CY26 Trainium connector TAM estimate +55% Y/Y on rack volume growth and moderate content uplift tied to the backplane.
- Copper expected to persist in AI NT/MT, particularly in scale-up, with active copper/CPC likely extending viability into 448G/lane era. Optics transition unlikely a cliff over next 3 yrs. CPO volume adoption potentially in ’27 for scale out; scale up likely in 2028+.
- Auto demand stable exiting 4Q; 1Q outlook seasonal. CY26 production outlook still flattish with risks from tariffs/USMCA/memory. CY26 Auto connector sales likely up MSD supported by pricing.
- Industrial reads moderately better with visibility improving; CY26 demand projected up MSD. Mil/Aero projected up HSD/LDD.
- Capacitors demand strengthening driven by AI; lead times stretching; factory utilization already high. Resistor & Inductor demand also up ticking; lead times stable with supply generally available. Passive B2B strengthening to ~1.2x on average.
Early 2026 IP&E indicators remain encouraging, following a strengthening in fundamentals towards the end of 2025. Similar to prior months, AI remains the primary growth engine for the industry; however, December and early January feedback suggest the recovery is gradually broadening across other end markets. B2B ratios have improved heading into 2026 (typically 1.1x+ in our work), alongside firmer backlogs and pricing discipline, which collectively supports a more constructive near-term outlook.
Importantly, buyer’s tone appears to be shifting, with procurement behavior moving towards supply sufficiency/securing allocation, which should further reinforce fundamentals. We are also beginning to see early signs of genuine improvement in select Industrial pockets (beyond pure restocking), though a significant portion of feedback still characterizes Auto/Industrial consumption as stable. Overall, datapoints appear supportive of a more durable recovery trajectory in 2026, though we would like to see broader confirmation in underlying consumption trends.
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