A-shares plunged.
On June 8, the Shanghai Composite closed down 1.7%, falling below 4,000; the STAR 50 dropped as much as 4.3%, becoming the hardest-hit part of the market correction.
Just the week before, sentiment was still fairly upbeat. In the tug-of-war between the AI industry trend and tightening global liquidity, the former had been in the lead. This time, however, the balance clearly tipped toward the latter.
What triggered the shift was a U.S. nonfarm payrolls report far stronger than expected.
At 20:30 Beijing time on June 5, the U.S. released May nonfarm payroll data: seasonally adjusted nonfarm payrolls rose by 172,000, far above the market forecast of 85,000; the unemployment rate was 4.3%, in line with expectations; more importantly, nonfarm job gains for March and April were revised up by a combined 93,000, reversing the previous pattern of continual downward revisions.
The signal from the data was clear: the U.S. labor market had not cooled as quickly as the market expected.
That is bad news for risk assets.
If the economy is not weak and inflation refuses to fade, the Fed has no reason to reopen the liquidity spigot. Especially under new Fed Chair Kevin Warsh, market expectations of a Fed backstop are fading.
Against this backdrop, the odds of a Fed rate hike later this year are rising. According to the FedWatch tool, the market now sees the probability of a rate hike in December 2026 rising from about 50% to nearly 70%.
If liquidity is no longer easy, the first assets to come under pressure are those that rely on distant growth expectations and are already richly valued: tech stocks.
On June 5, the Nasdaq fell 4.18% on the day, with tech stocks broadly tumbling; Micron, SanDisk and Intel dropped 13.25%, 11.39% and 11.28% respectively.
The June 8 A-share correction is essentially the same logic playing out in the domestic market.
So the question is: is this just a liquidity disturbance, or the start of a short-term turning point for A-shares?
The more extreme the move, the more cautious
A-shares should watch for a short-term correction ahead, not because fundamentals have worsened, but because the market has already reached an increasingly extreme level.
Under normal conditions, after a sharp rally, tech should see a deep correction to digest profits and rebalance expectations. In our piece 'The Truth Behind the Gold Crash,' we made a similar call.
But in reality, that correction did not arrive on schedule; instead, the market became more extreme, essentially because it was loading more and more chips onto the same direction.
Why did this happen?
If we break down the factors affecting the market, the underlying backdrop has not changed fundamentally.
The underlying backdrop refers to more traditional economic-cycle variables, including property, consumption, exports, and manufacturing investment. These factors set the tone for the economy and the overall earnings environment.
Property remains weak, consumption has not improved in a trend-like way, and global growth has not surprised materially to the upside. In other words, the basic logic supporting economic activity still feels somewhat subdued.
From a liquidity perspective, the situation is even worse.
As of June 8, the 10-year U.S. Treasury yield had climbed back to nearly 4.6%, Japan's 30-year government bond yield had already broken above 4.1% to the highest since 1999, and long-term yields in several major European economies were also trending higher. Meanwhile, May U.S. nonfarm payrolls beat expectations by a wide margin, and market bets on a Fed hike picked up again.
These signals all point to one fact: global liquidity remains tight, and may even have weakened versus before.
If the underlying backdrop has not improved materially and liquidity has not eased materially, where is the recent rebound in risk appetite coming from?
The answer is the easing of geopolitical risk.
Compared with the start of the year, U.S.-China relations have eased temporarily and the U.S.-Iran conflict has also cooled. Sentiment has clearly recovered, and capital naturally began searching for the AI theme with the clearest logic and the biggest imagination space.
AI is not only one of the clearest current industry trends, it is also one of the few directions that continue to receive heavy investment and attention from both China and the U.S. Compared with traditional manufacturing and trade, which are more easily affected by geopolitics, the long-term growth case for AI looks much clearer.
But the problem is that the recovery in risk appetite has already been fully priced in by the market, and there are even signs of overextrapolation.
AI has become the only main theme in the market right now. Related sectors and indices have surged in a short period, crowding has kept rising, and that is the biggest risk facing tech stocks.
As more capital is forced to chase the same direction, a classic 'short squeeze rally' has formed: if you don't get in, it rises every day; by the time you finally give in, the short-term top is usually not far away.
Has tech really topped out?
Not necessarily.
History shows tech is almost never absent from bull markets.
Around 2000 it was the internet; after 2009, smartphones and mobile internet; from 2013 to 2015, TMT, internet finance and media software; from 2019 to 2021, semiconductors, new energy and cloud computing; now it is AI, computing power and domestic semiconductor localization.
The logic behind this is simple: a bull market is essentially the market repricing the future. Once liquidity improves and risk appetite rises, capital most wants to buy the areas with the greatest future upside. Tech stocks are exactly that kind of asset: profits are far out in the future, the room to grow is huge, the narrative is strong, and valuation elasticity is the greatest.
Tech itself is also an important barometer of the economy, so liquidity and fundamentals often resonate in the tech sector.
More importantly, every bull market needs an era-defining story that can explain the future. The internet explained information connectivity, smartphones explained mobility, new energy explained energy restructuring, and AI explains the next round of productivity revolution.
For tech, the biggest contradiction today is not a change in the industry trend. Quite the opposite: the AI industry trend may be clearer than ever before. Whether it's computing-power investment, model iteration, or application rollout, the entire supply chain is still in a process of continued development.
What really deserves our attention is after this rally, can tech stocks still offer a risk-reward profile that matches their valuations—that is, whether the upside and downside risks are still in balance.
After all, the market has already largely priced the expectation for this industry trend into share prices.
When everyone believes the same story, the market needs fresh evidence that keeps beating expectations. That is why the later the rally, the higher the market's bar for earnings, orders and industry data.
Once the pace of industry delivery fails to keep up with valuation expansion, share prices can enter a correction even if the industry is still growing. In other words, the biggest enemy of tech stocks now is overly high expectations.
So whether you are suited to keep participating in this rally depends on the risk-reward ratio, which in turn depends on an investor's holding period, style and circle of competence.
As stated in 'The Stock Market Storm Is Coming,' investors who do not rely on 'long-term faith' and instead have a clear trading discipline or an information/research edge can stay in tech without issue. They can track orders, earnings, industry changes and crowding, and they can exit before the trend truly weakens.
But another type of investor needs to be cautious.
If you are a value investor who prefers low-valuation assets; or a cyclical investor who likes to buy at the bottom of an industry and wait for the cycle to recover, then the hottest moment in tech is actually not the best time for you to go in heavy.
What matters more now is to manage positions well, reduce exposure to crowded trades, and look for new opportunities.
What directions are worth watching?
Industries or names with low valuations and growth room.
From a valuation framework perspective, whether using the DCF model or the DDM model, government bond yields essentially correspond to the risk-free rate—that is, the denominator in valuation models—while the numerator is corporate earnings power and future growth.
Investing can actually be understood simply as two things: the bigger the numerator, the better; the smaller the denominator, the better. The faster the earnings growth, the better; the lower the risk-free rate, the better.
The reason dividend assets performed so well over the past few years was precisely because government bond yields kept falling. As the denominator kept shrinking, valuations naturally kept rising.
But things have changed somewhat now.
Although government bond yields are still relatively low—for example, the 10-year government bond yield is around 1.7%—they are no longer falling steadily as in the past few years. The pace of decline has slowed markedly, and more often they are moving sideways. This means the key driver that once powered dividend assets higher is weakening.
When the denominator no longer keeps expanding valuations, the market naturally turns its attention back to the numerator. Put more directly, the key to future stock performance may no longer be who has the highest dividend yield, but who has room for earnings growth.
And that may be the most important direction for the next stage of the market.
Many people easily misunderstand this. Growth room does not mean stable 20% annual growth; it actually means an upward change at the operating level. For example, if something has been growing 20%, and then suddenly grows 40% or 50%, only when both low valuation and improving growth exist at the same time is investment value at its highest.
In short, when the rally driven by improving risk appetite has already been fully priced in, while the pace of fundamental improvement has not kept up; when capital keeps crowding into one direction and the thematic story becomes increasingly extreme, the market's need for a short-term correction is actually building up.
Now the rally has reached the point where it needs a phase of digestion and rebalancing.
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