Author: Xiaobing
On June 5th, the US stock market experienced its most brutal day since the tariff crisis of April 2025.
The Nasdaq Composite plummeted 4.18%, closing at 25,709 points, losing over 1,121 points in a single day. The S&P 500 fell 2.64%, closing at 7,383 points, marking its largest single-day drop since October. The Dow Jones Industrial Average dropped 695 points (-1.35%), even though it had just hit a record high the day before. The VIX fear index surged 34% in a day, breaking through the 20 level, while the CNN Fear & Greed Index plunged from "Greed" to "Fear."
Just 72 hours earlier, on June 2nd, the S&P 500 had closed above 7,600 points for the first time. All three major indices were at historical highs. The market had risen for nine consecutive weeks, full of euphoria. Everything reversed within 48 hours.
To understand this plunge, one must see how three triggers were ignited simultaneously.
First Trigger: Broadcom's Earnings Report Tears the First Crack in the AI Narrative
The story begins after the market close on June 3rd.
Broadcom released its fiscal Q2 2026 earnings report. On the surface, it was a beautiful report: revenue of $22.2 billion, beating Wall Street expectations; adjusted earnings per share of $2.44, also beating expectations; AI chip revenue soared 143% year-over-year to $10.8 billion, far exceeding the company's own forecasts.
The problem lay in the guidance for the next quarter.
Broadcom projected Q3 AI chip revenue of $16 billion. The analyst consensus was $17.2 billion. This $1.2 billion gap might have only caused a mild pullback in a normal year, but 2026 is not a normal year.
Over the past year, the valuation of the entire semiconductor sector has been built on a core assumption: AI infrastructure capital expenditure is limitless, and hyperscale cloud companies (Google, Microsoft, Amazon, Meta) will buy computing power at any cost.
Broadcom's report did not deny AI's high growth; a 143% year-over-year growth rate is sufficient to prove strong demand. It merely hinted at a possibility: The slope of the growth rate might not be as steep as the most optimistic forecasts.
A more fatal detail emerged during the earnings call. CEO Hock Tan admitted that Google might introduce more chip suppliers, meaning Broadcom is no longer the sole favorite. He also noted that the rapid growth of the AI chip business is diluting the company's overall gross margin.
Against the backdrop of a stock that had risen 88% over the past year with a valuation already "priced for perfection," these signals were enough to trigger a stampede.
Broadcom plunged 12.6% on Thursday. By Friday, panic had spread across the entire semiconductor supply chain: Micron Technology plummeted 13.2%, Marvell plummeted 16.7%, Intel fell 11.3%, AMD fell about 11%, ARM fell 12.8%, and Qualcomm fell 11%. The Philadelphia Semiconductor Index plunged 10.26% in a single day, with none of its 30 components spared.
In total, US-listed chip companies lost approximately $1.3 trillion in market value on that day.
A key detail is crucial: none of these plunging companies issued their own bad news. Intel, AMD, Micron—they fell because investors were "extrapolating" Broadcom's signal. If Broadcom's AI growth is slowing, does the entire AI supply chain need revaluation?
This is the flip side of "narrative alpha." When a story is strong enough, all related assets are pulled in the same direction, regardless of their individual fundamentals.
Second Trigger: Overly Strong Jobs Data Becomes Market Poison
At 8:30 AM on Friday, the US Labor Department released the May Non-Farm Payrolls report: 172,000 jobs added, with the unemployment rate holding steady at 4.3%.
At first glance, this number even appears moderate. But in the context of expectations, it was a bomb: the Dow Jones consensus was only 80,000; the Reuters survey median was 88,000. 172,000 was exactly double Wall Street's expectation.
What made investors even more uneasy was the significant upward revisions for the previous two months: March was revised from 185,000 to 214,000; April was revised from 115,000 to 179,000, adding a total of 93,000 jobs. The three-month average monthly addition was about 188,000, far exceeding the Fed's internal estimate of 150,000 as the "break-even line." As long as employment stays above this line, there is no justification for a rate cut.
In normal economic logic, strong employment data is good news, signifying resilient economic growth, expanding businesses, and increased consumer spending.
But the US in June 2026 is not operating under "normal economic logic."
Since the Iran war broke out at the end of February, the effective blockade of the Strait of Hormuz has pushed up global oil prices. WTI crude remained above $92/barrel on June 5th, with Brent crude over $94. High oil prices have driven up everything: from transportation costs to food prices. Inflationary pressure has seeped from the supply side into the capillaries of the economy.
Against this backdrop, a stronger-than-expected jobs report conveyed a different message: The economy is too hot, so hot that the Fed might not only refrain from cutting rates but could even be forced to raise them.
The bond market reacted faster and more honestly than the stock market. The yield on the 10-year US Treasury note jumped from 4.47% to 4.54%, touching its highest level since late May. Data from the CME FedWatch Tool was even more striking: just a day earlier, market pricing for a rate hike by year-end was around 50%, a coin toss; after the report, this figure jumped to 73%, breaking above 80% after the close. Rate cut expectations were virtually zero.
This dual blow to tech stocks was twofold.
First, valuation compression. Tech stocks, especially high-growth AI-related stocks, have valuations highly dependent on discounted future cash flows. When the risk-free rate rises, the present value of every future dollar of profit shrinks. For every percentage point increase in rates, the theoretical valuation of a growth stock with a forward P/E of 40 might shrink by over 10%.
Second, capital rotation. When bond yields rise above 4.5%, decent returns can be obtained without taking any risk. For investors already flush with profits from AI stocks, selling overvalued tech stocks and shifting into Treasuries to lock in yields became a simple arithmetic problem.
An interesting counterpoint is that the Russell 2000 small-cap index actually rose 1.45% that day. Capital flowing out of overvalued large-cap tech stocks partly flowed into more reasonably valued, less rate-sensitive small and mid-cap stocks. This divergence itself indicates that the market wasn't panicking and indiscriminately selling everything; it was simply repricing the parts of the AI story that had been pushed to extremes.
Beneath the surface of the big 172,000 number, the quality of employment also conveyed uneasy signals. The figure was propped up by hotel waitstaff (Leisure & Hospitality +70k), government employees (Local Government +55k), and nurses (Healthcare +35k). Industries that truly reflect economic health were contracting: Financial Activities lost 22,000 jobs; Information sector employment has fallen 11% since its peak in November 2022.
Wage data also doesn't stand up to scrutiny. Average hourly earnings rose 3.4% year-over-year in May, which sounds good, but April CPI was already at 3.8%. Do some simple math: real wage growth was negative. Nominal wages are rising, but purchasing power in pockets is shrinking. This isn't economic prosperity; this is "working harder but getting poorer."
Third Trigger: The Lingering Inflation Shadow of the Iran War
The third thread is more like an undercurrent. It wouldn't trigger a plunge on its own, but it amplifies the destructive power of the first two triggers exponentially.
On February 28, 2026, the US and Israel launched military operations against Iran. Iran subsequently blockaded the Strait of Hormuz, cutting off the supply route for about 20% of the world's oil. The International Energy Agency termed it "the largest supply disruption in the history of the global oil market."
Three months later, the war continues. Although a framework for a temporary ceasefire agreement was reached between the US and Iran last week, new complications in Lebanon have stalled the final deal. Oil prices have retreated from the March highs of $110 but WTI remains above $90, significantly higher than pre-war levels.
This sustained high oil price poses a dilemma for the Fed. On one hand, the supply-side inflation caused by the war is not a problem 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 Fed is forced to respond.
The June FOMC meeting is imminent. The Fed's latest Summary of Economic Projections (SEP) still hints that the next move is a rate cut, maintaining a dovish bias. But the market no longer believes it. Fed funds futures are pricing in a hike, not a cut. If the Fed is forced to adopt a hawkish stance at the June meeting, it would be a formal end to the "soft landing" narrative of the past two years.
Citi analysts issued a warning on June 5th: The bubble level of global stock markets has reached its highest point since 2008.
When the Narrative's Foundation Begins to Crumble
Looking at these three triggers separately, you'll find they each attack a different dimension of market confidence:
The Broadcom earnings report attacks the "AI growth is limitless" narrative. It didn't say AI is bad; it just said the growth rate might not remain exponential forever. But when an entire sector's valuation is built on the assumption of "exponential growth," even a hint of deceleration is enough to trigger a collective revaluation.
The Non-Farm Payrolls data attacks the "Fed is about to cut rates" expectation. Over the past year, another pillar supporting the stock market rally has been liquidity expectations. If the Fed not only won't cut rates but might even raise them, then the two pillars supporting high valuations (growth narrative and liquidity expectations) are both wobbling.
The Iran war attacks the "inflation has been tamed" consensus. With oil prices above $90 and the Strait of Hormuz not yet fully reopened, the specter of inflation continues to haunt the market, making every Fed decision more difficult.
In combination, they form a dangerous feedback loop: AI growth slows, tech stock valuations come under pressure, rate hike expectations rise, cost of capital increases, high-valuation stocks face further pressure, selling spreads.
The US stock plunge quickly spread globally.
South Korea's KOSPI index plunged 5.54% on Friday; Samsung Electronics fell 6.4%; SK Hynix plummeted 9.9%. Tokyo stocks also fell sharply. In Europe, the Netherlands' ASML fell 3.8%; Germany's Infineon plunged over 6%.
The cryptocurrency market was not spared either. Bitcoin fell about 4% to around $60,000; Coinbase stock fell 7.1%; Strategy (formerly MicroStrategy) fell 6.9%. When risk assets retreat comprehensively, the "digital gold" narrative of crypto markets is once again put to the test by reality.
Gold futures dipped 0.35% to $4,489/ounce, failing to play its traditional safe-haven role. In an environment of rising rate expectations, the appeal of non-yielding assets also wanes.
Is This the Start of the AI Bubble Bursting?
This is the question on everyone's mind, but the answer is not as simple as it seems.
The bearish arguments are clear: the Philadelphia Semiconductor Index plunging 10% in a single day. A sell-off of this magnitude typically signifies a fundamental questioning of the growth assumptions for the entire sector. Marvell falling over 16% in two days, Micron falling 17% in two days—this is belief being shaken.
But the bullish arguments also hold weight. Broadcom's AI chip revenue grew 143% year-over-year, and the full-year AI semiconductor revenue guidance still exceeds $56 billion. These are not the numbers an industry in a bursting bubble should deliver. The problem lies in the slope of the growth rate: AI demand remains real and vast, but can the growth rate match Wall Street's wildest imaginations?
A more accurate characterization might be: this is a "valuation repricing," not a "narrative collapse." The market is waking up from the euphoria of "AI can make everything skyrocket to the heavens" and starting to examine with cooler eyes: which companies can truly make money from AI, and which ones are just along for the ride.
The S&P 500, even after the plunge, remains near historical highs. It has pulled back about 5% from this week's peak, which historically falls within the range of a normal technical correction. The real test lies ahead: Will this pullback stop at 5%, or will it slide towards 10% or deeper?
Three key nodes in the next two weeks will determine the market's direction.
First, the June FOMC meeting. Will the Fed maintain its stance that the next move is a rate cut, or formally pivot to a hawkish stance? If the Fed acknowledges the possibility of a hike, the market may face another round of valuation compression.
Second, earnings and guidance from more AI companies. Broadcom opened Pandora's box; the market needs other AI winners (especially Nvidia) to prove the AI growth story isn't over. The next earnings season will be a critical validation window.
Third, the evolution of the Iran situation. If a ceasefire agreement can finally land and oil prices fall back below $80, easing inflation pressure, the Fed's policy space will widen significantly, allowing for a rapid market rebound. If the war drags on, everything becomes more complicated.
The June 5th plunge is a warning, not a verdict. The underlying logic of the AI revolution hasn't changed; the demand for chips remains real. What has changed is the market's expectations for the growth rate and the price investors are willing to pay for that expectation.
It's only when the tide starts to go out that you see who's been swimming naked.
On June 5th, the tide itself is still there; it's just rising a beat slower. But even that one beat is enough to soak the clothes of those fully invested with tears—for instance, this poor editor.
