Nasdaq drops 4.2% in a single day, "Black Friday" pops the US stock bubble?

Original | Odaily Planet Daily (@OdailyChina)

Author | Qin Xiaofeng (@QinXiaofeng 888 )

On Friday, June 5, U.S. stocks experienced their sharpest single-day pullback of 2026 so far. The Nasdaq Composite Index plunged 4.18% to close at 25,709.43 points, marking its largest single-day drop since April 2025; the S&P 500 Index fell 2.64% to 7,383.74 points, ending a nine-week winning streak; the Dow Jones Industrial Average dropped 695.15 points (1.35%) to close at 50,866.78 points. The Philadelphia Semiconductor Index plummeted over 10%, with a single-day market cap evaporation of approximately $1.3 trillion, led by declines in core AI stocks such as Nvidia, Broadcom, Micron, and Marvell.

Suddenly, the question "Has the U.S. stock market peaked?" spread from trading floors to screens of global investors. Odaily Planet Daily will combine recent data and historical comparisons for a rigorous analysis: Is the current valuation of U.S. stocks too high? Is this pullback a healthy correction or a trend reversal? What are the future driving factors?

1. Anatomy of the June 5 Crash: A Data-Driven "Perfect Storm"

The direct trigger for this crash was the non-farm payroll data released on Friday evening.

The U.S. Department of Labor reported that non-farm payrolls increased by 172,000 in May, nearly double the market expectation of 88,000 and significantly higher than April's 115,000. April's employment data was already above expectations. Furthermore, March's employment data was revised upward by 29,000, and April's data was revised up by 64,000. The employment growth rate over the past three months has become the strongest in the last two years. This indicates a systematic underestimation of the U.S. employment situation by previous data, enough to raise market concerns about an overheating economy.

The strong employment data pushed up inflation expectations, leading the market to anticipate the earliest possible Fed rate hike in October this year. Following the data release, U.S. Treasuries were sold off. The yield on the 10-year Treasury note rose 5.8 basis points to 4.531%, while the yield on the more policy-sensitive 2-year Treasury note climbed over 7 basis points in a single day to 4.1%.

The jump in bond yields dealt a heavy blow to tech stocks, which, as high-valuation, high-growth assets, are most sensitive to interest rates.

Although Broadcom's earnings report the previous day was strong, its AI custom chip business guidance failed to meet extremely high market expectations, triggering a chain reaction. Nvidia fell over 6%, Micron dropped 13.3%, Marvell declined 16.7%, and AMD lost 10.9%. Profit-taking concentrated in the semiconductor sector, coupled with doubts about the sustainability of AI capital expenditure, created an avalanche effect. Meta reportedly plans to invest tens of billions more in AI, but it failed to reverse the sector's downturn.

Trading volume surged, and the VIX volatility index spiked 37% to 21.15, indicating a rapid spread of risk aversion. Bitcoin fell below $60,000 simultaneously, and gold and crude oil also adjusted, putting risk assets under broad pressure. However, not all sectors declined: defensive sectors like utilities, healthcare, and consumer staples bucked the trend, with "old-economy blue chips" like Johnson & Johnson and Coca-Cola attracting safe-haven capital. This suggests the market is not in full-fledged panic but undergoing a targeted adjustment in high-valuation sectors.

On a weekly basis, the S&P 500 ended its nine-week winning streak, and the Nasdaq recorded a weekly loss of 4.7%, its worst in over a year. The Dow was relatively resilient, falling only 0.3% for the week, indicating signs of sector rotation.

"This is an extreme case of 'good news is bad news,'" said Michael Wilson, Chief US Equity Strategist at Morgan Stanley, in a post-market report. "Strong employment data means the Fed's tightening shackles will be fastened more tightly. It directly shakes the only pillar supporting the high valuation of U.S. stocks: the imminent expectation of rate cuts."

2. The AI Myth Fades: Dominos of a Crowded Trade

If the non-farm data was the fuse, then the froth and fragility accumulated within the AI sector itself represent the massive explosive charge.

Over the past 18 months, AI has been the sole narrative driving U.S. stocks to repeated new highs. Nvidia's market cap briefly surpassed $5 trillion, accounting for over 7% of the S&P 500 index's weight. The combined market cap of AI ecosystem-related stocks within the S&P 500 once approached 40%.

However, entering the second quarter of 2026, cracks began to appear in this belief.

Several cloud service providers, in recent supply chain surveys, have reportedly been cutting some orders for Nvidia's next-generation Blackwell Ultra chips, citing excessive hoarding in the previous period and the monetization speed of enterprise AI applications being far slower than infrastructure investment. Although Nvidia's financial report released at the end of May still showed impressive figures, its revenue growth guidance has slowed for the third consecutive quarter, and gross margin shows signs of decline.

The previously extremely crowded long mega-cap tech trade, under the impact of rising interest rates, quickly turned into a stampede-like liquidation. When the non-farm data triggered a rate spike, the appeal of holding these high-duration, high-valuation growth stocks suddenly diminished. Their fragile marginal buyers—leveraged quantitative funds and retail investors—were the first to buckle, triggering a chain reaction.

"The AI trade has shifted from FOMO (fear of missing out) to fear of being trapped," said renowned value investor and GMO co-founder Jeremy Grantham, who has long warned about AI's excessive valuation. He has compared the current situation to the eve of the 2000 internet bubble, noting that many AI companies' revenues may struggle to support their current high valuations.

3. Valuation and Historical Comparison: Has the U.S. Stock Market Reached a Bubble Top?

The reason this pullback has sparked widespread discussion about whether "the market has peaked" is that it occurs against the backdrop of converging multiple high-valuation and sentiment indicators.

First, valuations are at historical highs. Before the June 5 pullback, the S&P 500's Cyclically Adjusted Price-to-Earnings (CAPE) ratio, also known as the Shiller P/E, was around 39.5 times. This is the third highest level after the 2000 dot-com bubble and the 2021 pandemic easing period, significantly higher than the levels before the 2007 financial crisis. The forward P/E ratio also reached around 22.5 times, well above the long-term historical average of 15.8 times. The "Buffett Indicator"—the ratio of total U.S. stock market capitalization to GDP—touched a high of 237% at the end of May, far exceeding the "severely overvalued" range (>120%) defined by Buffett himself. Any unexpected negative news could accelerate mean reversion.

Second, capital and sentiment are at extreme levels. The Bank of America Bull & Bear Indicator rose to 8.5 in late May, firmly locked in the "extremely bullish" zone, which is often considered a reliable contrarian sell signal. The bullish percentage in the American Association of Individual Investors (AAII) survey spent most of May in the 35%-45% range, showing optimism but not reaching extreme frenzy. Retail investor margin debt remained near a historical high of around $1.3 trillion during April-May, indicating still active leverage usage.

Meanwhile, "smart money" has shown signs of retreat: Berkshire Hathaway's Q1 13F report showed its cash and equivalents reserve reached a historical high of approximately $397 billion, and the company continued to be a net seller of stocks in Q2. The ratio of insider selling to buying rose to a high level since 2021 in May.

Third, key technical breakdown occurred. Last Friday, the S&P 500 not only broke below short-term moving averages but also pierced the lower rail of its recent upward channel. The index is currently facing a test of its 200-day moving average (around the 7000-7200 point range). Technicians like BTIG's Chief Technical Strategist Jonathan Krinsky point out that if the S&P 500 fails to quickly reclaim key support levels and subsequently loses the 200-day moving average, it would technically confirm the start of a medium-term correction, potentially with a decline of 10%-15%.

4. Bull vs. Bear Debate: Pullback, Correction, or Start of a Bear Market?

In response to the market pullback, bulls and bears on Wall Street quickly took sides, engaging in a heated debate.

The bearish camp believes this could be the beginning of a bubble adjustment. Some strategists point out that the U.S. economy shows signs of "stagflation" risk—while the May ISM Manufacturing PMI rebounded to 54.0 (expanding from the previous month), inflation indicators remain sticky. They warn that corporate profit growth may face downward revision pressure due to financing costs and demand uncertainty, and equity risk premiums are currently at low levels.

Albert Edwards, a prominent strategist at Societe Generale who has long held cautious views, warns that the AI bubble is similar to past tech bubbles, potentially involving capital misallocation and challenges for some companies, posing a significant risk of correction for the Nasdaq index.

The bullish camp, however, emphasizes that this is a healthy, albeit overdue, adjustment within a bull market. David Kostin, Chief US Equity Strategist at Goldman Sachs, acknowledges valuations are high but believes the market, driven by earnings growth, still has support. He expects S&P 500 constituent earnings to grow by about 7% in 2026, with productivity gains from AI starting to improve corporate profit margins in the second half of the year. "The strong non-farm data precisely proves that the economy is not experiencing a hard landing, and recession risk is extremely low. Once the rate panic subsides, capital will realize the solidity of the earnings base." Goldman Sachs maintains a relatively high year-end target for the S&P 500, previously raising it to the 6900-7600 range.

UBS Global Wealth Management also advises clients to "buy the dip," citing still-healthy household and corporate balance sheets and continued corporate stock buyback plans providing a buffer for the market.

Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, offers a more nuanced and pragmatic perspective: "A 'top' is never a point; it's a process. Currently, the phase of broad-based rallies driven by liquidity and sentiment has ended. We are entering a stock-picker's market driven by fundamentals. The overall market index might trade sideways to slightly lower over the coming months, but a 2008-style collapse is unlikely unless we see a freeze in the credit markets."

5. Key Junctures Ahead: Inflation Data and the Fed's "Judgment"

Undoubtedly, two major events in the coming week will serve as crucial watersheds determining the nature of this adjustment. On Wednesday, June 10, the U.S. May Consumer Price Index (CPI) will be released. The market generally expects the core CPI year-over-year increase to be around 2.8%-2.9% (April was 2.8%). If the data significantly exceeds expectations, it will further strengthen market concerns about "inflation stickiness" and could push back expectations for Fed rate cuts further, thereby increasing pressure on the bond and stock markets.

The Federal Open Market Committee (FOMC) meeting on June 16-17 will be a key observation window. Following the strong non-farm payroll data on June 5, several Fed officials reiterated the need for caution. Officials like Cleveland Fed President Beth Hammack emphasized that while the labor market shows resilience, interest rates may need to remain at their currently relatively high levels for a longer period. The Summary of Economic Projections (dot plot) released then will be closely watched. If the median forecast shows fewer rate cuts in 2026 than previously expected, or even suggests keeping rates unchanged for the whole year, market expectations for the rate path will undergo a significant reconstruction.

Additionally, geopolitical and trade policy risks could introduce further uncertainty. The U.S. has already implemented import tariffs and export controls on advanced semiconductors to strengthen domestic supply chain security and limit the outflow of key technologies. When tech stock sentiment is fragile, this ongoing policy direction could still have long-term impacts on the global AI industry chain, raise the inflation floor, and consequently compress valuations of some companies.

Summary

Back to the initial question: "Has the U.S. stock market peaked?"

For investors, all the necessary conditions to confirm a long-term top—extreme valuations, policy shift, core narrative weakening, retail frenzy, and technical breakdown—are appearing simultaneously for the first time in over a decade. Historical experience shows that when these signals resonate highly, even if the bull market doesn't end immediately, its risk-reward ratio has already deteriorated significantly. The market is currently in a fragile transition from "narrative" to "reality." The long-term productivity promise of the AI revolution must now undergo the rigorous scrutiny of every macroeconomic data point and earnings report.

The era of unilaterally betting on an ever-rising market may have passed. Caution is the most fundamental respect for risk. Over the next two weeks, investors need to watch every decimal point in the May CPI report and every potential shift in the Fed's dot plot. Together, they will determine whether this summer is just an episode within a bull market or the prologue to a new era.