Stocks and gold slid on Fed rate hikes and Iran deadlock concerns.

 

·       AI bubble panic is also accelerating rotational shifts from tech to real economy stocks; metals and defense stocks are under stress as the Iran war may be over.

·       The market is now assuming an 80% probability of a Fed rate hike of 25 bps in Dec '26 and higher for longer monetary policy, contrary to earlier perceptions.

·       At around 305 projected EPS for CY27 and a 22-20 average fair PE (base case) against a 22-20% average CAGR, the average fair value of SPX-500 may be around 6700-6100 (against the recent high of 7600).

·       The Fed may be on hold in 2026 rather than hiking amid transitory, hotter inflation and a stable labor market.

Wall Street was buoyed for the last few weeks on the Iran deal and AI optimism despite a fragile ceasefire, Trump’s constant back-and-forth stances, and growing concern over the AI bubble, especially after Broadcom’s subdued guidance. Also, for the last few days, there was a trend of sector rotation from AI/tech/digital to real economy stocks. Thus, tech-heavy NQ-100 was correcting from the record high, while real-economy-savvy DJ-30 was gaining. But industrial/metal and defense sectors were also under stress as the best of Iran's war may already be over, while the Ukraine war may also be over by the next few weeks/months. Along with all these, the market is now also discounting potential Fed rate hikes of 25-50 bps by December '26 if US inflation does not normalize and the Strait of Hormuz double blockade lingers.

On Friday, June 5, 2025, the US job/NFP report comes out hotter than expected. The market is now expecting an 80% probability of a 25 bps Fed rate hike in Dec '26 vs an earlier 40%. Wall Street was already concerned about a valuation bubble as the TTM PE was hovering around 30. A hotter-than-expected May job report and the subsequent higher probability of a Dec '26 Fed rate hike (instead of earlier perceptions of rate cuts by new Fed Chair Warsh) acted as a trigger, and stocks, bonds, and gold slid, while U.S. bond yields and the USD got some boost.

Several primary reasons behind Friday’s epic market fall include:

·       Record high indices and overvaluation, including a growing AI bubble.

·       Ongoing Iran/SOH deal deadlock and elevated oil (even after Friday’s correction).

·       The growing concern of a Fed rate hike of 25 bps by Dec’26 (higher for longer) instead of the earlier perception of rate cuts under new Fed Chair Warsh—selected by Trump after a ‘rigorous interviewing process’—to ensure loose monetary policy (lower for longer)

·       The growing concern of US stagflation/stagnation (higher inflation, higher unemployment, and lower growth) under the Trump 2.0 policy uncertainty

Overall, Wall Street experienced a sharp reversal on Friday, June 5, 2026, as stronger-than-expected U.S. employment data dampened hopes for imminent Fed rate cuts and accelerated a profit-taking rout in high-valuation technology and semiconductor stocks. The Nasdaq Composite plunged 4.2%, recording its worst single-day performance since April 2025, while the S&P 500 fell 2.6% and the Dow Jones Industrial Average declined 1.35% (approximately 695 points), closing at around 50,867 after setting a record high the previous session.

The primary catalyst was the U.S. Labor Department's May jobs report, which showed employers added 172,000 nonfarm payroll positions—far exceeding economist forecasts of roughly 80,000–85,000. The unemployment rate held steady at 4.3%, underscoring labor market resilience even amid ongoing geopolitical tensions, including energy price pressures from the Iran-U.S. standoff.

This "good news is bad news" dynamic reignited concerns over persistent inflation and restrictive monetary policy. Treasury yields spiked, with the 10-year note climbing above 4.5% (closing near 4.52%–4.55%) and the 30-year yield surpassing 5%. Growth-oriented sectors, particularly artificial intelligence (AI) and semiconductors, bore the brunt of the selling as higher discount rates weighed on future earnings valuations (operating cash flow). Gold, often a beneficiary of uncertainty, instead faced pressure from a stronger dollar and rising real yields. The Friday session marked the end of the S&P 500's nine-week winning streak and highlighted growing market divergence: defensive sectors and financials provided some cushion, while overheated tech names unraveled.

Overview

The market reaction on June 5 reflected a confluence of macroeconomic signals and sector-specific vulnerabilities. The robust jobs print reduced expectations for Federal Reserve easing, pushing investors to reassess the pricing of high-multiple growth stocks that had powered much of the 2025–2026 rally.

Equity Markets

Selling was concentrated in technology. The Nasdaq's 4.2% decline (closing near 25,709) outpaced broader indices, driven by a semiconductor meltdown. Broadcom (AVGO) fell nearly 8% on Friday, extending double-digit losses (~15%) from Thursday after its AI guidance disappointed relative to lofty expectations. NVIDIA (NVDA) dropped around 6%, Micron Technology (MU) plunged approximately 13%, and names like Marvell Technology saw double-digit declines. The chip sector erased over $1 trillion in market value across the two-day selloff.

The S&P 500 shed 2.64% to close around 7,384, snapping its streak of gains. In contrast, the Dow Jones fared better, declining 1.35%, supported by relative strength in banks, healthcare, and consumer staples. Visa, Procter & Gamble, and UnitedHealth Group advanced over 1%, illustrating a classic rotation from growth to value and defensives amid rising rates. For the week, the S&P 500 lost more than 2%, and the Nasdaq dropped around 4.7%, representing their weakest weekly performances in over a year.

U.S. Treasuries (USTs)

Bond markets sold off aggressively. The stronger labor data signaled a resilient economy with less urgency for rate cuts, driving yields higher. The 10-year Treasury yield rose above 4.5% and finished the session near 4.52%–4.55%, while the 30-year yield topped 5.0%. The 2-year yield climbed to its highest level in a year, reflecting revised Fed policy expectations that now include a greater probability of rate hikes later in 2026. This yield surge increased borrowing costs across the economy, pressuring interest-rate-sensitive sectors like real estate and utilities while benefiting banks through wider (higher) net interest margins (NIMs). The US10Y bond yield, now around +4.5%, may rise further to around 4.8-4.98/5.0% in the coming days/weeks.

Gold and Safe Havens

Gold prices came under pressure despite geopolitical uncertainties. Spot gold fell roughly 0.7%–1% on the day, trading around $4,440–$4,466 per ounce after opening near $4,503. Higher real yields and a firmer dollar reduced the appeal of non-yielding assets like bullion. The metal had been trading near multi-year highs but erased some 2026 gains amid the risk-off move in equities and shifting monetary expectations. Gold has lost almost 18% since March after the Iran war broke out and oil/inflation expectations surged. But despite the Iran war and Middle East geopolitical tensions, gold is apparently losing its safe-haven appeal as Middle East investors/sovereigns may be selling their gold (after a record rally) to compensate for their potential revenue loss from Iran’s SOH embargo on oil.

Broader Context

The selloff occurred against a backdrop of lingering inflation risks, partly fueled by energy prices amid Middle East tensions. While the jobs data is fundamentally positive—indicating economic strength—it challenges the narrative of imminent policy easing that had supported elevated valuations in AI and tech. But a healthy correction after parabolic gains in semiconductor stocks ensured the Philadelphia Semiconductor Index suffered significant losses. Other assets reflected the mood: Bitcoin and broader crypto markets also declined sharply, underscoring a broad de-risking. Market breadth was negative, with decliners dominating, though volume and volatility (VIX) remained contained relative to historical shocks, suggesting this was more profit-taking than panic.

Fair Valuation of SPX-500

The actual TTM EPS for Q3CY25 was around $234, and at the present run rate/trend, the CY25-26 EPS may come around ₹252-309. The average fair value should be around 5675-6853~6264. In the normal base case scenario, the fair value should be around 6850, and in the bear/worst case scenarios, it may even fall to around 6250.

Technical outlook: DJ-30, NQ-100, SPX-500, and gold

Looking ahead, whatever may be the narrative, technically Dow Future (CMP: 51120) now has to sustain over 51500-51700 for a further rally to 52300-52700 in the coming days; otherwise, sustaining below 51300/51000, it may fall to 50500/50200-50000/49500 and further to 48500/48000-47600/46600 and 46000/45700*-45200*/45000 and 43800/43000-42000/39000-36800 in the coming days.

Similarly, NQ-100 Future (30600) now has to sustain over 30700 for a further rally to 31000/31200-31500*/32000 and even 32400/32500 in the coming days; otherwise, sustaining below 30600/30300-30000/29500-29100/28500*-28100/27800, it may fall to 27400-27000 and 26600/26300-26000/25600; NQ-100 may again fall to 24600/24400-24000/23900 and further to 23600/23300-22800/22400 and 21900-21000 in the coming days.

Looking at the chart, technically SPX-500 (CMP: 7600) now has to sustain over 7700 for a further rally to 8000-8300 in the coming days; otherwise, sustaining below 7675/7650-7550/7500-7300*/7200 and 7100-6900, it may fall to 6835/6700 and further 6600-6500/6450 and 6350/6300-6250/6180 and 5860-4800 in the coming days.

Similarly, gold (4327) is now gassed to sustain over 4300 for a rebound to 4375/4415-4505/4550 and further 4650/4775-4920*/5200 in the coming days; otherwise, sustaining below 4290, gold may further fall to 4200/4150*-4090*/3980 and further 3880/3725 in the coming days.