Written by: Chaoxiang Research

Core Contradiction of the Day

Nine consecutive days of gains have almost made the market forget one thing: the U.S.-Iran war that started three months ago is still ongoing. On June 3, Iran fired 13 ballistic missiles and 17 drones at Kuwait, severely damaging Kuwait International Airport and resulting in one death. The U.S. military subsequently struck an Iranian military ground control station on Kish Island in the Strait of Hormuz. WTI crude oil surged to $96, the 10-year U.S. Treasury yield followed suit, and the S&P 500's nine-day winning streak came to an end.

AI can create dreams, but missiles will wake you up.

On Wednesday, Wall Street collectively reversed its gains.

The Dow Jones Industrial Average plummeted 620.72 points (-1.21%) to 50,687.07, the largest decline of any major index on that day. The S&P 500 fell 0.74% to 7,553.68, ending its nine-day winning streak since May 21, the last time such a long winning streak occurred was at the end of 2024. The Nasdaq dropped 0.89% to 26,853.98, while the Russell 2000 fell 1.25%, with small-cap stocks once again proving to be the most sensitive thermometer for risk sentiment.

Just a day earlier, the three major indexes were all at historic highs.

Middle East Conflict Reignited, Oil Prices Drive Inflation Expectations

The sell-off on June 3 had a very specific trigger: Iran launched a large-scale airstrike on Kuwait early in the morning.

The Kuwaiti military confirmed that Iran launched a total of 13 ballistic missiles and 17 drones, causing severe damage to the country's main international airport and resulting in one death. The Iranian Revolutionary Guard later admitted to striking the U.S. Fifth Fleet headquarters and "military facilities of another country," but did not name Kuwait. The Revolutionary Guard stated that this move was retaliation for the U.S. attack on Kish Island.

From the U.S. military's side, Central Command announced precise strikes on the Iranian military ground control station on Kish Island. Kish Island, located at the entrance of the Strait of Hormuz, is a key point where Iran threatens merchant shipping.

On that day, Trump stated that "Iran agrees not to develop nuclear weapons," but immediately followed up with, "They can change their minds." On the same day, the U.S. House of Representatives passed a war powers resolution calling for an end to military actions against Iran, symbolically rejecting Trump's handling of the war.

JPMorgan pointed out in a report that the accelerated consumption of oil inventories will "ultimately force the Strait of Hormuz to reopen, regardless of the method," and predicted that the strait might resume navigation within June. However, for traders, the word "might" is not sufficient.

The direct result of the situation in the Middle East: WTI crude oil closed up 2.41% to $96.02 per barrel, while Brent crude rose 1.89% to $97.81 per barrel.

Rising oil prices triggered a chain reaction: inflation expectations rise → probability of the Federal Reserve raising interest rates by the end of the year remains above 60% → 10-year U.S. Treasury yields rise further → high-valuation growth stocks come under pressure. This transmission chain has repeated itself over the past three months, but the market selectively ignored it during the AI frenzy in May. Reality brought the bill back on June 3.

The VIX volatility index rose sharply from the previous day's range of 15-16, ending nearly two weeks of low performance. The fear gauge has started to breathe again, indicating a return of hedge demand.

Sectors Under Pressure: Communication, Financials, and Technology Lead the Decline

Almost all 11 sectors of the S&P 500 experienced a rout.

The communication services sector remained the weakest of the week, with Alphabet continuing to feel pressure (-0.67%) in the wake of the previous day's announcement of an $80 billion share increase. Microsoft fell sharply by 3.28% on that day, dragging down the technology sector. While financial stocks awaited the upcoming non-farm payroll data on Friday, they displayed obvious hesitation in the rising interest rate environment.

The software sector overall declined by 2.43%. Palo Alto Networks (PANW), which surged 8% after hours the previous day, was instead sold off after opening, closing down 4.37%. The earnings report exceeded expectations, but the urge to cash in was stronger. This trend itself hinted that the market had switched from a "buy the expectation" mode to a "sell the fact" mode.

The energy sector was likely one of the few that gained against the trend, benefiting from the spike in oil prices. However, even so, the overall market breadth was very poor, indicating not a day of "sector rotation," but a day of "collective retreat."

Broadcom After-Hours: Record AI Revenue, but Market Unimpressed

The real highlight after hours on June 3 was Broadcom’s (AVGO) Q2 earnings report.

The numbers themselves were not bad: total revenue of $22.2 billion, a year-on-year increase of 48%, accelerating significantly from Q1's growth rate of 29%; adjusted EPS of $2.44, exceeding Wall Street's expectation of $2.40; AI semiconductor revenue reached $10.8 billion, a staggering year-on-year increase of 143%, setting a historical record, achieving AI-driven growth for the 13th consecutive quarter. Free cash flow was $10.26 billion, representing 46% of revenue. CEO Hock Tan’s Q3 guidance was for $29.4 billion in revenue, of which AI chip revenue is expected to exceed $16 billion, with a year-on-year growth of over 200%.

However, Broadcom’s shares plummeted over 8% after hours, down about 5% at the time of writing. The market's pain points were twofold:

First, total revenue of $22.187 billion was slightly below the consensus expectation of $22.27 billion, a gap of less than $100 million, or less than 0.4%. But for a stock with a price-to-earnings ratio of 87, which had already risen 13.6% within five trading days, the margin for error was practically zero.

Second, infrastructure software (including VMware) revenue was $7.178 billion, lower than the expected $7.32 billion. This sector is the strategic core of Broadcom following its $69 billion acquisition of VMware in 2023, and the market has independent expectations for its growth pace.

This was a textbook case of "buy the expectation, sell the fact." Broadcom's AI business growth was impeccable, but when a stock rises 13.6% in the five days before earnings, all the good news has already been discounted, and any minor miss becomes a reason for selling.

CrowdStrike: Performance Exceeds Expectations, Announces Stock Split

Also reporting after hours, CrowdStrike (CRWD) delivered a strong performance: Q1 FY2027 revenue of $1.39 billion (+26%), with EPS of $1.10, significantly exceeding the expected $0.88. Net new ARR reached $256 million (+32%), a record for a single quarter.

The management also announced a 4-for-1 stock split, with the record date set for June 25, and trading at the split price beginning July 2. CEO George Kurtz defined this quarter as "the moment of collision between cybersecurity and cutting-edge AI," stating that CrowdStrike has become the "AI security infrastructure."

Following last year's globally impactful outage, CrowdStrike has demonstrated its resilience through several consecutive quarters of performance. The decision to split the stock also sends a clear signal: management is confident in the long-term trajectory of the stock price.

This Week's Outlook: Non-Farm Data Determines Market Direction

On Wednesday, ADP employment data and ISM services PMI were released, and Friday will see the real showdown of the week, the non-farm employment report for May.

In the context of persistent high inflation driven by oil prices, the significance of the employment data is not just about "how well the economy is doing," but whether "the Federal Reserve will be forced to raise interest rates." JOLTS data showed that job openings surged to 7.6 million in April (the highest in nearly two years, far exceeding the expected 6.88 million), and the resilience of the labor market has left rate-cut advocates nearly silent. If Friday's non-farm payrolls are strong, U.S. Treasury yields could further surge above 4.5%, putting even greater pressure on the stock market's valuation logic.

Data sources: CNBC, Yahoo Finance, Bloomberg, NPR, BLS, TheStreet, JPMorgan Research. Disclaimer: This article represents the author's views only and does not constitute investment advice. Markets have risks, and investments should be made cautiously.