Author: Xiao Bing

On June 5th, the US stock market experienced its worst day since the tariff crisis in April 2025.

The Nasdaq Composite Index plummeted 4.18%, closing at 25,709 points, a single-day evaporation of over 1,121 points. The S&P 500 fell 2.64%, closing at 7,383 points, marking the largest single-day decline since October. The Dow Jones Industrial Average dropped 695 points (-1.35%), just a day after reaching a historic high. The VIX fear index surged 34% within a day, breaking through the 20 mark, while the CNN Fear & Greed Index plummeted from "Greed" to "Fear."

Just 72 hours earlier, on June 2nd, the S&P 500 closed above 7,600 points for the first time. All three major indices were at historic highs. The market had been rising for nine consecutive weeks in a euphoric atmosphere, and then everything reversed within 48 hours.

To understand this crash, it is necessary to see how three triggers were ignited simultaneously.

First: Broadcom's Earnings Report Opened the First Crack in the AI Narrative

The story begins after the close on June 3rd.

Broadcom released its Q2 fiscal report for 2026. On the surface, it was a splendid report: revenue of $22.2 billion exceeded Wall Street’s expectations; adjusted earnings per share of $2.44 also surpassed forecasts; AI chip revenue surged 143% year-on-year to $10.8 billion, far exceeding the company's own predictions.

The problem lay in the outlook for the next quarter.

Broadcom projected Q3 AI chip revenue at $16 billion. The consensus expectation among analysts was $17.2 billion. This $1.2 billion gap might only trigger a mild correction in a normal year, but 2026 is not a normal year.

Over the past year, the entire semiconductor sector's valuation was built on a core assumption: capital expenditure on AI infrastructure is limitless, and hyper-scale cloud companies (Google, Microsoft, Amazon, Meta) will spare no expense in purchasing computing power.

Broadcom's report did not deny AI's high growth; a year-on-year growth rate of 143% is enough to indicate strong demand. It merely hinted at a possibility: the slope of growth may not be as steep as the most optimistic expectations.

More fatal details emerged during the earnings call. CEO Hock Tan admitted that Google might introduce more chip suppliers, indicating that Broadcom is no longer the sole darling. He also pointed out that the rapid growth of the AI chip business is diluting the company's overall gross margin.

In a context where a stock had risen 88% over the past year, and its valuation had become "priced for perfection," these signals were sufficient to trigger a sell-off.

Broadcom plummeted 12.6% on Thursday. By Friday, panic spread throughout the semiconductor supply chain: Micron Technology fell 13.2%, Marvell plummeted 16.7%, Intel dropped 11.3%, AMD fell about 11%, ARM declined 12.8%, and Qualcomm fell 11%. The Philadelphia Semiconductor Index lost 10.26% in a single day, with all 30 component stocks suffering without exception.

US-listed chip companies collectively vaporized about $1.3 trillion in market value on that day.

A key detail: none of the companies that fell had released any bad news of their own. Intel, AMD, and Micron were merely responding to investors extrapolating Broadcom's signals—if Broadcom's AI growth slows, shouldn't the entire AI supply chain be revalued?

This is the opposite of "narrative alpha." When a story is strong enough, all related assets are pulled in the same direction, regardless of their individual fundamentals.

Second: Too Strong Employment Data Became the Market's Poison

On Friday at 8:30 AM, the US Department of Labor released the non-farm payroll report for May: 172,000 new jobs added, with the unemployment rate holding steady at 4.3%.

This number looks mild at first glance. But in the context of expectations, it’s a bombshell: the consensus from Dow Jones expected only 80,000, while a Reuters poll estimated a median of 88,000. 172,000 is a full double of Wall Street’s expectations.

What made people restless was that the data for the previous two months was also revised significantly: March was revised from 185,000 to 214,000, and April from 115,000 to 179,000, totaling an additional 93,000 jobs. Over the past three months, the average monthly increase was about 188,000, far exceeding the Federal Reserve's internal estimated "break-even line" of 150,000. As long as employment remains above this line, there’s no reason to cut interest rates.

In normal economic logic, strong employment data is good news, indicating robust economic resilience, corporate expansion, and consumers having money to spend.

But the US in June 2026 does not operate within "normal economic logic."

Since the outbreak of the Iran war at the end of February, the substantial blockade of the Strait of Hormuz has pushed global oil prices higher. WTI crude oil was still above $92 per barrel on June 5th, and Brent crude exceeded $94. High oil prices raised everything: from transportation costs to food prices, inflation pressure has already seeped into the economic capillaries from the supply side.

In this context, a stronger-than-expected employment report conveys a twisted signal: the economy is too hot, hot enough that the Federal Reserve may not only refrain from cutting rates but could even be forced to raise them.

The bond market reacted more quickly and honestly than the stock market. The yield on the 10-year US Treasury jumped from 4.47% to 4.54%, reaching the highest level since late May. Data from the CME FedWatch tool was even more startling: just a day earlier, the market had priced in a roughly 50% chance of a rate hike before the end of the year; after the report came out, that figure soared to 73%, and exceeded 80% after the close. Expectations for rate cuts nearly vanished.

This had a double-edged impact on tech stocks.

The first layer is valuation compression. Tech stocks, especially high-growth stocks related to AI, highly depend on the present value of future cash flows. When risk-free rates rise, the present value of every future dollar of profit decreases. With every one percentage point increase in interest rates, a growth stock with an expected PE ratio of 40 could see its theoretical valuation shrink by over 10%.

The second layer is capital rotation. When bond yields rise above 4.5%, one can achieve decent returns without assuming any risks. For those investors who have already made substantial profits in AI stocks, selling overvalued tech stocks and moving into government bonds to lock in returns becomes a simple mathematical problem.

An interesting counterpoint is that the Russell 2000 small-cap index rose 1.45% on that day. Capital flowed out of overpriced large-cap tech stocks, with some migrating into mid and small-cap stocks that are more reasonably valued and less sensitive to interest rates. This differentiation itself indicates that the market is not panicking to sell everything indiscriminately; it is merely re-pricing the parts of the AI narrative that have been pushed to extremes.

Beneath the surface of that large number of 172,000, the quality of employment was also signaling unease. Supporting that number were hotel workers (leisure hospitality +70,000), government employees (local government +55,000), and nurses (healthcare +35,000); however, sectors that truly reflect economic conditions were shrinking: the financial sector lost 22,000 jobs, and employment in the information sector has declined by 11% since its peak in November 2022.

Wage data also doesn’t hold up under scrutiny. Average hourly wages in May increased by 3.4% year-on-year, which sounds good, but the April CPI had already reached 3.8%. Doing some basic subtraction: real wage growth is negative. Nominal wages are rising, but the purchasing power in wallets is shrinking. This is not economic prosperity; this is "becoming poorer while working harder."

Third: The Shadow of Inflation from the Iran War Lingers

The third clue is more like an undercurrent; it may not independently trigger a crash, but it amplifies the destructive power of the first two triggers exponentially.

On February 28, 2026, the US and Israel launched military action against Iran. Iran subsequently blocked the Strait of Hormuz, cutting off about 20% of global oil supply routes. The International Energy Agency termed it "the largest supply disruption in global oil markets ever."

Three months have passed, and the war is still ongoing. While the US and Iran reached a framework for a temporary ceasefire last week, new variables in Lebanon have stalled a final agreement. Oil prices have retreated from the peak of $110 in March, but WTI still remains above $90, far above pre-war levels.

This sustained high oil price poses a dilemma for the Federal Reserve. On the one hand, the supply-side inflation caused by war is not something monetary policy can solve; raising rates won’t reopen the Strait of Hormuz. On the other hand, if inflation expectations become unanchored due to high oil prices, the Federal Reserve will have to react.

The June FOMC meeting is approaching. The Federal Reserve's latest Summary of Economic Projections (SEP) still suggests that the next move is to cut rates, maintaining a dovish stance. But the market is no longer buying it. The federal funds futures are pricing in rate hikes, not cuts. If the Federal Reserve is forced to turn hawkish at the June meeting, it will formally end the narrative of a "soft landing" that has prevailed over the past two years.

Citi analysts warned on June 5th: the degree of bubble in global stock markets has reached the highest level since 2008.

When the Foundation of a Narrative Begins to Shake

When looking at these three triggers individually, you’ll find that each attacks a different dimension of market confidence:

Broadcom's earnings report attacked the narrative of "unlimited AI growth." It did not claim that AI is bad; it merely stated that growth may not always remain exponential. However, when the valuations of the entire sector are built on the assumption of "exponential growth," even a slight hint of deceleration is enough to trigger a collective revaluation.

The non-farm data attacked the expectations of "the Federal Reserve is about to cut rates." Over the past year, another pillar supporting the stock market's rise has been expectations of liquidity. If the Federal Reserve not only refrains from cutting rates but may actually raise them, then both pillars supporting high valuations (growth narrative and liquidity expectations) would wobble simultaneously.

The Iran war attacked the consensus that "inflation has been tamed." When oil prices remain above $90 and the Strait of Hormuz has yet to fully reopen, the ghost of inflation continues to hover over the market, complicating every decision made by the Federal Reserve.

The combination of the three forms a dangerous feedback loop: AI growth slows, tech stock valuations face pressure, rate hike expectations rise, cost of capital increases, high-valuation stocks face further pressure, and sell-offs spread.

The drop in US stocks quickly transmitted to the global market.

The KOSPI index in South Korea plummeted 5.54% on Friday, with Samsung Electronics down 6.4%, and SK Hynix dropping 9.9%. The Tokyo stock market also saw significant declines. In Europe, the Netherlands' ASML fell 3.8%, and Germany's Infineon crashed over 6%.

The cryptocurrency market also did not escape. Bitcoin fell about 4% to around $60,000, Coinbase's stock dropped 7.1%, and Strategy (formerly MicroStrategy) fell 6.9%. When risk assets retreat across the board, the cryptocurrency market's "digital gold" narrative is once again tested by reality.

Gold futures dipped 0.35% to $4,489 per ounce, failing to play the traditional role of a safe haven. In an environment of rising rate hike expectations, the appeal of non-yielding assets is also declining.

Is This the Beginning of the AI Bubble's Collapse?

This is the question everyone cares about, but the answer is not as straightforward as it seems.

The bearish argument is clear: the Philadelphia Semiconductor Index dropped 10% in a single day, an extent of sell-off that typically indicates a fundamental questioning of growth assumptions across an entire sector. Marvell fell over 16% in two days, and Micron dropped 17% in two days; this reflects a wavering faith.

However, the bullish arguments also hold weight. Broadcom's AI chip revenue grew 143% year-on-year, and its full-year AI semiconductor revenue guidance still exceeds $56 billion. These are not numbers that an industry experiencing a bubble burst should present. The issue lies with the slope of growth: AI demand is still real and substantial, but can the growth rate match Wall Street's wildest imaginations?

A more accurate qualitative assessment might be: this is a "valuation re-pricing," not a "narrative collapse." The market is waking up from the euphoria of "AI can make everything rise to the sky" and starting to look more calmly: which companies can truly profit from AI, and which are merely hitching a ride?

The S&P 500 remains close to historical highs after the sharp drop. It has retreated about 5% from this week’s peak, which historically falls within a normal technical correction range. The real test is: will this pullback stop at 5%, or slide to 10% or even deeper?

In the next two weeks, three key milestones will determine the market's direction.

First, the June FOMC meeting. Will the Federal Reserve continue to maintain its stance on the next move being a rate cut, or formally shift to a hawkish position? If the Federal Reserve acknowledges the possibility of raising rates, the market could face another round of valuation compression.

Second, more earnings reports and guidance from AI companies. Broadcom has opened Pandora's box; the market needs other AI winners (especially Nvidia) to demonstrate that the story of AI growth is not over. The next earnings season will be a crucial validation window.

Third, the evolution of the situation in Iran. If a ceasefire agreement can ultimately be reached and oil prices fall below $80, easing inflation pressures, the Federal Reserve's policy space will be significantly opened, and the market is likely to rebound quickly. If the war continues to drag on, everything will become more complicated.

The drop on June 5th serves as a warning, not a verdict. The underlying logic of the AI revolution has not changed; demand for chips still exists. What has changed is the market's expectations for growth and the price investors are willing to pay for those expectations.

When the tide begins to retreat, you can see clearly who is swimming naked.

On June 5th, the tide itself remained; it just slowed down a bit, but that bit was enough to leave those fully invested in tears, like the poor little editor.

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