U.S. stocks suffered one of the most severe single-day sell-offs in recent years on Friday, and the AI market that lasted for two months suddenly cooled down.

On Friday, the Nasdaq Composite Index plunged more than 1,121 points in a single day, the largest single-day point drop in history. The S&P 500 lost $1.8 trillion in value.

The non-farm payrolls data for May released on Friday was stronger than expected, completely dashing the market’s last hopes for a rate cut by the Federal Reserve and quickly intensifying concerns about raising interest rates in 2026.

Interest rate swaps showed traders expect the Fed to raise its target for the federal funds rate by 0.25 percentage point at its December policy meeting.

In addition to the non-agricultural data exceeding expectations, multiple catalysts this week jointly triggered a collective crisis of confidence on Friday:

• Broadcom's financial guidance is disappointing, taking the lead in piercing the market belief that "all companies benefiting from AI are indestructible."

• Alphabet issued a large-scale additional stock to raise funds for capital expenditures.

• Meta is also considering following up on similar financing plans, which has suddenly heightened investors' concerns about the dilution of technology giants' equity.

• In addition, the SpaceX IPO is expected to further divert market funds.

Non-farm data exceeds expectations, and interest rate hike expectations are back again

The May non-farm payrolls report released on Friday showed a strong recovery in the labor market, which became the direct trigger of this round of selling.

After the report was released, the interest rate swap market quickly fully priced in the Fed's expectation of a 25 basis point interest rate hike within the year, and the probability of a rate hike at the October meeting rose to about 60%.

The 10-year U.S. Treasury yield rose 7 basis points to 4.54%, and the 30-year yield returned above 5%. Short-term yields were under the most obvious pressure, with the 2-year yield rising by about 10 basis points.

Tracy Chen, Brandywine Global Asset Management Portfolio Manager, said:

The employment data suggests that the labor market is recovering, and inflation should be the focus of the Fed. As inflation approaches the unemployment rate, the Fed may already be behind the curve.

Since the outbreak of the Iran conflict, the market has gradually priced in the possibility of raising interest rates in 2026. The release of strong employment data further reduced the Fed's room to keep interest rates unchanged.

Jose Torres of Interactive Brokers said:

Rising yields and falling oil prices mean investors are worried the Federal Reserve will raise interest rates.

The sudden shift in expectations for the Federal Reserve's policy path strengthened the U.S. dollar. The U.S. dollar index recorded its best single-day performance in two months, rising more than 1% during the week and breaking through multiple key technical resistance levels again.

Broadcom financial report pierces the AI "moat" myth

The foreshadowing of this round of plunge was laid by Broadcom’s financial report earlier this week.

After Broadcom released its latest quarterly results, its guidance fell short of market expectations, causing the previously soaring semiconductor market to stall.

(After Botong’s performance, the stock price fell sharply on June 4)

Steve Sosnick, chief market strategist at Interactive Brokers, believes:

The trigger is never obvious, but I think Broadcom represents a shift in thinking. The guidance is disappointing... I think it punctures a lot of people's belief that any company that might benefit from AI spending is indestructible.

Previously, market sentiment was staggeringly optimistic. Memory and optical chip stocks have led a strong but highly concentrated rally since the second quarter.

Continuous breakthroughs in AI model capabilities have revitalized investors' confidence in the prospects of artificial intelligence. The continued commitment of ultra-large-scale cloud computing providers to the construction of data centers has created a huge supply bottleneck for key components such as high-bandwidth memory chips.

Take Micron Technology as an example. Its stock price has risen by more than 200% from the end of March to this Thursday, and its market value once exceeded US$1 trillion, making it the 12th trillion-dollar company in the world.

However, this parabolic run came to an abrupt end after Broadcom’s results were released. On Friday, the Philadelphia Semiconductor Index plunged more than 10%, losing more than $1 trillion in market value in a single day, recording its worst single-day decline since March 2020.

Google, Meta additional issuance and SpaceX IPO: the "siphon effect" of funds is coming

Amid late Friday losses, another piece of news accelerated the decline.

According to the British "Financial Times" report, Meta is considering following Alphabet's lead and implementing large-scale equity financing to meet its huge capital expenditure needs.

Michael Kramer, founder of Mott Capital Management, said:

Alphabet’s recent equity issuance, coupled with rumors that Meta may follow suit, may fundamentally change the market’s investment logic for these companies if these companies begin to issue shares on a large scale to finance capital expenditures.

Kramer further pointed out:

In the coming quarters, these companies are likely to face a dilemma: raise debt and issue more stock to meet spending needs, or cut capital spending. Both of these results are hardly optimistic for the stock price.

According to previous reports by Bloomberg, the total capital expenditures of technology giants for data center construction reached as high as 820 billion U.S. dollars. The market had previously regarded this figure as evidence of a boom in investment in AI infrastructure.

Today, as the financing method shifts from internal cash flow to external issuance, the appeal of this narrative is quietly fading.

At the same time, rising expectations for SpaceX's IPO have also triggered discussions in the market about capital diversion, further exacerbating investors' doubts about overdraft valuations under the AI capital expenditure narrative.

The two-month strong market came to an abrupt end, and funds flowed to the defensive sector

Bloomberg macro strategist Michael Ball pointed out that Friday’s decline was more of a re-pricing of crowded AI capital expenditure-leading stocks. The Dow only closed slightly lower during the week, indicating that the decline was concentrated in high-beta momentum varieties.

Michael Ball analyzed that the highly crowded positions in the technology stock sector make any fluctuations easy to turn into a self-reinforcing sell-off. He said:

As economic growth appears more resilient, the valuation premiums enjoyed by long-term winners in AI capex deserve lower multiples.

In addition, there were obvious signs of defensive switching in capital flows on Friday. The consumer staples sector bucked the trend and rose 1.6%. Coca-Cola's stock price rose 3.5% in a single day, becoming one of the few bright spots in U.S. stocks on Friday.

This pattern of differentiation shows that some investors have taken the initiative to reduce their risk exposure and seek shelter in defensive assets.

SpotGamma defines the 7,500-point area as the most critical risk watershed for the S&P 500 currently: standing above this level, market maker hedging flows can help slow down the decline and promote mean reversion.

Once it falls below, forced selling at the individual stock level and the collapse of option skew may cause the index to lose support.

Analysts believe that Friday may be just the first chapter of this story.