Author: Xiao Bing, Trend Research
On June 5th, the U.S. stock market experienced its most brutal day since the tariff crisis in April 2025.
The Nasdaq Composite Index plummeted 4.18%, closing at 25,709 points, shedding over 1,121 points in a single day. The S&P 500 fell 2.64% to 7,383 points, marking its largest one-day drop since October. The Dow Jones Industrial Average declined by 695 points (-1.35%), just one day after hitting a new all-time high. The VIX Fear Index surged 34% in a single day, breaking through the 20 threshold, and the CNN Fear & Greed Index plummeted 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, and everything seemed perfect. The reversal happened within 48 hours.
To understand this crash, one must see how three triggers were ignited simultaneously.
The First Trigger: Broadcom's Earnings Report Tore the First Crack in the AI Narrative
The story begins after the market close on June 3rd.
Broadcom Inc. released its Q2 2026 fiscal year earnings report. On the surface, it was an excellent report: revenue of $22.2 billion, exceeding Wall Street expectations; adjusted earnings per share of $2.44, also beating estimates; AI chip revenue skyrocketed 143% year-over-year to $10.8 billion, far surpassing the company's own forecast.
The problem lay in the outlook for the next quarter.
Broadcom projected AI chip revenue for Q3 to be $16 billion. The analyst consensus estimate was $17.2 billion. This $1.2 billion gap, in a normal year, might have only triggered a mild correction. But 2026 is not a normal year.
Over the past year, the valuation of the entire semiconductor sector has been built on one core assumption: Capital expenditures for AI infrastructure are limitless, and hyperscale cloud computing companies (Google, Microsoft, Amazon, Meta) will buy computing power at any cost.
Broadcom's report did not deny the high growth of AI; a 143% year-over-year growth rate was strong enough proof of demand. It merely hinted at a possibility: the slope of the growth rate might not be as steep as the most optimistic projections.
Even more critical details emerged during the earnings call. CEO Hock Tan acknowledged that Google might introduce more chip suppliers, meaning Broadcom was no longer the sole favorite. He also pointed out that the rapid growth of the AI chip business was diluting the company's overall gross margin.
Against the backdrop of a stock that had risen 88% in the past year with valuations already "priced for perfection," these signals were enough to trigger a stampede.
Broadcom plunged 12.6% on Thursday. By Friday, panic had spread throughout the entire semiconductor supply chain: Micron Technology plummeted 13.2%, Marvell nosedived 16.7%, Intel fell 11.3%, AMD dropped about 11%, ARM slid 12.8%, and Qualcomm declined 11%. The Philadelphia Semiconductor Index (SOX) plunged 10.26% in a single day, with all 30 component stocks suffering losses.
U.S.-listed chip companies collectively lost about $1.3 trillion in market capitalization on that day.
One key detail: none of these plummeting companies had released their own bad news. Intel, AMD, Micron—they fell simply because investors were "extrapolating" Broadcom's signals. If Broadcom's AI growth is slowing, does the entire AI supply chain need to be revalued?
This is the flip side of "Narrative Alpha." When a story is powerful enough, all related assets get pulled in the same direction, regardless of their individual fundamentals.
The Second Trigger: Too-Strong Employment Data Became Market Poison
At 8:30 AM on Friday, the U.S. Labor Department released the May Nonfarm Payrolls report: 172,000 jobs added, with the unemployment rate holding steady at 4.3%.
This number, at first glance, even seemed moderate. But placed against expectations, it was a bomb: the Dow Jones consensus estimate was only 80,000, and the Reuters survey median was 88,000. 172,000 was double the Wall Street forecast.
What made it even more unsettling was significant upward revisions to the previous two months' data: March was revised from 185,000 to 214,000, April from 115,000 to 179,000, adding a combined 93,000 jobs. The average monthly gain over the past three months was about 188,000, far exceeding the Fed's internal estimate of the 150,000 "break-even line." As long as job growth stays above this line, there is no reason for interest rate cuts.
Under normal economic logic, strong employment data is good news, indicating economic resilience, expanding businesses, and consumers with money to spend.
But the United States in June 2026 was not operating under "normal economic logic."
Since the Iran war erupted 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, and Brent crude exceeded $94. High oil prices have pushed 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, an unexpectedly strong 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 U.S. Treasury note jumped from 4.47% to 4.54%, hitting its highest level since late May. Data from the CME FedWatch Tool was even more startling: just a day earlier, the market priced the probability of a rate hike by year-end at around 50%, a toss-up. After the report, this number jumped to 73%, and after the close, it broke through 80%. Expectations for rate cuts were virtually zero.
The damage to tech stocks was twofold.
First, valuation compression. Tech stocks, especially high-growth AI-related ones, have valuations heavily dependent on the discounting of future cash flows. When risk-free interest rates rise, the present value of every dollar of future profit shrinks. Each percentage point increase in interest rates could theoretically shrink the valuation of a growth stock with a forward P/E of 40 by over 10%.
Second, capital rotation. When bond yields rise above 4.5%, you can get a decent return without taking any risk. For investors who have already made substantial gains on AI stocks, selling overvalued tech stocks and shifting into Treasuries to lock in returns becomes a simple math problem.
An interesting counterpoint was the Russell 2000 small-cap index, which rose 1.45% on the day. Funds flowed out of overvalued large-cap tech stocks, with some moving into more reasonably valued, less interest-rate-sensitive small and mid-cap stocks. This divergence itself indicates: the market isn't panicking and selling everything indiscriminately; it's merely repricing the parts of the AI story that had been pushed to extremes.
Beneath the surface of the large 172,000 figure, the quality of employment also signaled unease. This number was propped up by hotel waiters (Leisure & Hospitality +70,000), government employees (Local Government +55,000), and nurses (Healthcare +35,000). Sectors that truly reflect economic strength were contracting: the finance industry lost 22,000 jobs, and employment in the information sector has declined 11% since its peak in November 2022.
The wage data didn't stand up to scrutiny either. Average hourly earnings rose 3.4% year-over-year in May, sounding decent, but April's CPI was already 3.8%. A simple subtraction: real wage growth was negative. Wages are rising in name, but purchasing power is shrinking. This isn't economic prosperity; this is "working harder to get poorer."
The Third Trigger: The Lingering Inflation Shadow of the Iran War
The third thread is more like an undercurrent. It wouldn't trigger a crash alone, but it magnified the destructive power of the first two triggers.
On February 28, 2026, the U.S. and Israel launched military operations against Iran. Iran subsequently blocked the Strait of Hormuz, cutting off about 20% of the global oil supply route. The International Energy Agency labeled it "the largest disruption to global oil supply in history."
Three months have passed, and the war is not over. Although the U.S. and Iran agreed on a framework for a temporary ceasefire last week, new developments in Lebanon have stalled a final agreement. Oil prices have retreated from their March highs of $110 but remain above $90 for WTI, significantly higher than pre-war levels.
This sustained high oil price creates a dilemma for the Federal Reserve. On one hand, the supply-side inflation caused by the war is not something monetary policy can solve; raising interest rates won't reopen the Strait of Hormuz. On the other hand, if inflation expectations become unanchored due to high oil prices, the Fed might be forced to react.
The June FOMC meeting is approaching. The Fed's latest Summary of Economic Projections (SEP) still suggests the next move is a rate cut, maintaining an easing bias. But the market is no longer buying it. Federal 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 mark the official end of the "soft landing" narrative of the past two years.
On June 5th, Citigroup analysts warned: The bubble level in 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 attack different dimensions of market confidence:
Broadcom's earnings attacked the narrative of "unlimited AI growth." It didn't say AI is bad; it merely suggested that growth 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 nonfarm data attacked the expectation that "the Fed will soon cut rates." Over the past year, another pillar supporting the stock market rally has been liquidity expectations. If the Fed not only refrains from cutting but may even raise rates, then both pillars supporting high valuations (the growth narrative and liquidity expectations) begin to wobble simultaneously.
The Iran war attacked the consensus that "inflation has been tamed." As long as oil prices stay above $90 and the Strait of Hormuz isn't fully reopened, the specter of inflation will continue to haunt the market, making every Fed decision more difficult.
The combination of the three creates a dangerous feedback loop: AI growth slows, tech valuations come under pressure, rate hike expectations rise, the cost of capital increases, high-valuation stocks face further pressure, and the sell-off spreads.
The U.S. stock plunge quickly spread globally.
South Korea's KOSPI index plummeted 5.54% on Friday, with Samsung Electronics down 6.4% and SK Hynix plunging 9.9%. Tokyo stock markets also fell sharply. In Europe, Netherlands-based ASML dropped 3.8%, and Germany's Infineon tumbled over 6%.
The cryptocurrency market was not spared either. Bitcoin fell about 4% to around $60,000, Coinbase stock dropped 7.1%, and Strategy (formerly MicroStrategy) fell 6.9%. When risk assets retreat across the board, the "digital gold" narrative of crypto markets is once again tested by reality.
Gold futures edged down 0.35% to $4,489 per ounce, failing to play its traditional safe-haven role. In an environment where rate hike expectations are heating up, the appeal of non-yielding assets also diminishes.
Is This the Start of the AI Bubble Bursting?
This is everyone's most pressing question, but the answer is not as simple as it seems.
The bearish arguments are clear: a 10% single-day plunge in the Philadelphia Semiconductor Index typically signifies a fundamental questioning of the market's growth assumptions for the entire sector. Marvell falling over 16% in two days, Micron down 17% in two days—this is a sign of shaken faith.
But the bullish arguments also carry weight. Broadcom's AI chip revenue grew 143% year-over-year, and its full-year AI semiconductor revenue guidance still exceeds $56 billion. These are not numbers an industry in a bursting bubble should deliver. The problem lies in the slope of growth: AI demand remains real and massive, 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 from the frenzy of "AI can make everything go to the moon" and beginning to examine with cooler eyes: which companies can truly make money from AI, and which are just riding the wave.
The S&P 500, even after the plunge, remains near historical highs. It has retreated about 5% from this week's peak, which falls within the range of a normal technical correction in historical terms. The real test is: Will this pullback stop at 5%, or will it slide towards 10% or even deeper?
Three key events 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 will it formally pivot to a hawkish stance? If the Fed acknowledges the possibility of a hike, the market could face another round of valuation compression.
Second, more earnings reports and guidance from AI companies. Broadcom opened Pandora's box; the market needs other AI winners (especially Nvidia) to prove that the AI growth story isn't over. The next earnings season will be a crucial validation window.
Third, the evolution of the Iran situation. If a ceasefire agreement is finally reached, oil prices fall back below $80, and inflationary pressures ease, the Fed's policy space will open up significantly, and the market could rebound quickly. If the war drags on, everything becomes more complicated.
The June 5th crash is a warning, not yet a verdict. The underlying logic of the AI revolution hasn't changed; chip demand remains real. What's changed is the market's expectations for the growth rate and the price investors are willing to pay for that expectation.
When the tide begins to recede, you see who's been swimming naked.
On June 5th, the tide itself was still there; it just slowed its rise by a beat. But that single beat was enough to soak through the clothes of those who were all-in, such as poor little me.
