A recent research report explores the underlying causes and potential extent of the recent pullback in U.S. equities.

The sharp decline in U.S. stocks on June 5th represents a cautious correction of overvalued assets. While the long-term narrative for technological innovation and hardware may be far from over, a short-term earnings vacuum has left buyers uncertain due to a lack of concrete evidence. Furthermore, as the market is in a "vacuum period" for physical capacity expansion, there are near-term concerns about insufficient profit realization from upstream sectors. The report suggests that in a market with relatively limited liquidity, the concentrated fundraising by tech giants may be gradually eroding the remaining market liquidity. Another significant risk largely ignored by the market is a micro-level "anti-AI wave," where reduced spending by small and medium-sized enterprises on AI services could trigger a chain reaction: lower input-output ratios for AI vendors, a subsequent contraction in their capital expenditures, and ultimately, a shift in the market's valuation paradigm for AI. A sustained rally in U.S. stocks may need to wait for these potential risks to be further released. The key points from the analysis are as follows:

Examining the Recent Downturn

Why did U.S. stocks suddenly retreat on June 5th? Superficially, a strong non-farm payrolls report intensified market fears of tighter liquidity. In essence, it was a prudent correction of overvalued assets. As the S&P 500 repeatedly hit new highs, underlying imbalances were pushed to extremes: a significant 68% of its components had already retreated more than 10% from their previous highs, with 19% having fallen over 40%. The index's continued climb was largely driven by the resonance of quantitative strategies and crowded long positions creating irrational exuberance. As positive catalysts on the earnings side were exhausted and negative factors on the interest rate side materialized, a corrective pullback became inevitable.

Drivers and Duration of the Correction

The core reason for the current correction is that long-term conviction lacks support from short-term cash flows. The market's focus is shifting from capital expenditures to free cash flow, not merely due to Broadcom's earnings miss. Previously, institutions bet on rapid Capex growth, believing "more investment equals higher barriers." Now, the market is reckoning with the erosion of free cash flow by high depreciation. With a lack of immediate cash flow realization, this correction is primarily led by technology stocks. When macro data hits critical levels, crowded positions at high valuations can trigger a stampede-like sell-off. May's better-than-expected jobs data pushed the 10-year Treasury yield back above 4.5%, pressured forward P/E ratios across the market, and triggered liquidations in the semiconductor sector by quantitative and systematic strategies. The 10% drop in chips on June 5th wasn't just about expectations for tighter monetary policy; it was a "stampede" by extremely crowded, leveraged long positions as the liquidity tap tightened.

Prospects for Market Recovery

While the long-term hardware narrative for tech innovation persists, the short-term earnings vacuum leaves buyers in a state of uncertainty. Although the supply-demand imbalance for memory chips may continue in the medium to long term, the market broadly lacks micro-level data showing how AI investment translates into profits for giants. A clear catalyst for a rally may be absent until at least Apple's Worldwide Developers Conference next week, or even until the Q2 earnings season for major U.S. tech companies. Additionally, as the market is in a "vacuum period" for physical capacity expansion, near-term concerns exist about insufficient profit release upstream. Around 2024, global wafer fabs are in a peak period of construction-related capital expenditure. Given the 2-3 year lag for chip output, investments by major tech firms have yet to yield significant production. Until new chip capacity is delivered at scale, corporate earnings may struggle to exceed expectations, potentially leading to a correction in U.S. stocks amid high, range-bound Treasury yields. A sustained uptrend may require further release of latent risks.

Potential Policy Intervention

How much of a decline can the U.S. government tolerate? On one hand, a reversal of the paper wealth effect could prompt earlier action from the "invisible hand" of the White House and the Fed. Assuming a marginal propensity to consume of 3%-5%, a greater than 10% drop in the S&P 500 could, under a neutral scenario, slow U.S. consumption by about 1.6% by Q2 2026—a midterm election year. If a correction approaches the sensitive zone above 10%, the U.S. Treasury might proactively release liquidity by adjusting its TGA account. On the other hand, the negative drag on consumption from falling asset prices could be greater than the positive boost from rising prices. If the S&P 500 falls over 20% rapidly into a technical bear market, household savings propensity could surge significantly. The wealth evaporation's drag could align with more pessimistic assumptions, implying a potential for negative quarterly growth in U.S. personal consumption expenditures in 2026. In summary, a 10% correction might be the trigger point for U.S. government action, with around 20% representing a potential limit for the downturn.

Impact of Rising Rates and Inflation

With inflation approaching a critical threshold, a CPI reading breaking above 4% could trigger monetary tightening alerts. When nominal inflation crosses this key level (it reached 3.8% in April), it often signals the end of a phase of liquidity红利 on the denominator side, putting pressure on the absolute returns of equity assets. Historically, since 1934, the S&P 500 has averaged a -5.4% return in the three months following a CPI break above 4%, highlighting the short-term压制 of high inflation on equities. In terms of market style, a rotation towards defensive value stocks could accelerate, pressuring tech stocks in the near term. After U.S. CPI year-on-year breaks above 4%, the Nasdaq has underperformed the S&P 500 75% of the time over the next three months (since 1973). Even in periods where the Nasdaq posted gains, the maximum drawdown during those periods exceeded the gains, reflecting the uncertainty and fragility of growth factors in a high-inflation environment. More notably, inflation trading could increase the equity risk premium for U.S. stocks. Once CPI surpasses 4%, the positive correlation between the 10-year Treasury yield and U.S. stocks can weaken significantly or even turn negative. If rapid inflation subsequently fuels "NACHO" trade升温, the risk-free rate anchor could keep shifting higher, pressuring U.S. stock valuations from the denominator side. Persistently high Treasury yields could continue to压制 U.S. stocks from the denominator side, suggesting盲目追高 may be counterproductive. When the 10-year yield breaches 4.6%, the short-term risk-reward for U.S. equities becomes less attractive. Historically, the S&P 500 has averaged only a 2.9% expected gain over the next three months in such environments, while enduring a -5.9% maximum drawdown. The Nasdaq, while averaging a 6.6% gain, also experienced high volatility with a -8.8% drawdown. This reflects that in a high-rate environment,盲目追高 can ultimately prove costly. In summary, as Treasury yields show a negative correlation with U.S. stock returns, the continued rise in yields and inflation could persistently削弱 the near-term allocation value of U.S. equities.

Additional Downside Risks to Monitor

In a market with relatively有限 liquidity, the密集融资 by tech giants may be gradually吞噬 the remaining market liquidity. Google's massive refinancing and behemoth IPOs like SpaceX could create a near-term资金虹吸 effect. Based on standard lock-up periods of 90-180 days, a significant wave of share unlocks could arrive around late Q3 to Q4. A deeper concern is the shift by large tech firms from "light asset" models towards "high-leverage computing arms races," making their earnings and cash flows potentially more sensitive to interest rates. Another significant risk largely overlooked by the market is the micro-level "anti-AI wave." Data suggests the投入创利比率 for U.S. AI is projected to decline in 2025-2026, reflecting that resistance to purchasing AI services by small and medium-sized enterprises is having an effect. The potential传导路径 is: SMEs reduce AI service spending, leading to lower input-output ratios for AI vendors, followed by a contraction in their Capex, and ultimately, a change in the market's AI定价范式.