Today, the three major A-share indices all closed lower.
The Shanghai Composite Index fell by 1.7%, the Shenzhen Component Index dropped 3.22%, and the ChiNext Index declined by 3.69%.
Trading volume across the Shanghai, Shenzhen, and Beijing markets exceeded 2.8 trillion yuan, shrinking by nearly 300 billion yuan from the previous session, with more than 4500 stocks declining.
Semiconductor and chip stocks, which had seen substantial gains recently, have been the hardest hit for two consecutive days.
Simultaneously, global technology stocks faced a broad and severe downturn.
The Nikkei 225 Index closed down 3.85% at 64,024.60 points.
The KOSPI in South Korea, closely linked to the AI sector, plunged 8.29%, fueling widespread market skepticism about a potential AI bubble burst.
Key Factors Behind the Tech Stock Crash
The catalyst for this round of tech stock declines was the stronger-than-expected U.S. May non-farm payrolls data released last Friday evening.
Analysts note that the robust employment figures, which nearly doubled market expectations, led to a significant shift in monetary policy expectations, dashing hopes for imminent Federal Reserve rate cuts.
This shift, combined with previously crowded trades in the tech sector and other corporate events, triggered the sharp market correction.
This change in the interest rate outlook has placed substantial pressure on technology stocks and assets like gold.
For the red-hot AI trade, the impact of higher interest rates is clear.
AI companies require massive capital expenditures for chips, servers, and data centers, and rising long-term yields can negatively impact their valuations.
Investor Sentiment and Losses
One investor from Hangzhou reported losing 110,000 yuan in a single day, marking his largest loss this year.
The downturn in A-share tech stocks began showing signs last week, following a powerful rally that left the AI sector increasingly crowded, with signs of profit-taking emerging.
Last Friday, major U.S. indices plummeted, with the Philadelphia Semiconductor Index crashing over 10% and the Nasdaq dropping more than 1100 points, erasing over $1 trillion in market value in a single day and marking its worst session since March 2020.
This sell-off further solidified signals of a short-term peak in the AI sector.
Newer retail investors who entered the market during May's rally are now facing paper losses, with some holdings down over 10%, creating anxiety and uncertainty about whether to sell.
Is the AI Bubble Bursting?
Over the past two months, the global AI sector experienced accelerated gains, with investors convinced that not holding AI meant missing the biggest future wealth opportunity.
As the sector became extremely crowded, questions about an AI bubble have surfaced.
Analysts suggest this is not necessarily a reflection of deteriorating industry fundamentals but rather an indicator of market crowding at different stages.
Some strategists view the U.S. market adjustment as driven more by capital flows and sentiment within a crowded trade, rather than a fundamental change in the core investment thesis.
It represents a structural rebalancing as some investors take profits amid negative news.
Market Concentration and Historical Context
Analysts at Goldman Sachs noted that the S&P 500's rally since late March, which saw a 15% gain in two months ranking in the top 1% of historical returns since 1980, was closely tied to AI-related stocks and momentum trading.
This has led investors to question if the advance was too rapid.
Their report indicates that while speculative fervor is often a feature of market peaks, current sentiment indicators, though elevated, remain below historical extremes seen during the dot-com bubble or the 2021 market peak.
Market breadth has narrowed significantly, meaning a small number of stocks are driving most of the gains, though concentration is still lower than during the late-1990s tech bubble.
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