---
title: "How Long Will the US Stock Market Correction Last? How Much Retracement Can the US Government Tolerate?"
type: "News"
locale: "en"
url: "https://longbridge.com/en/news/288986020.md"
description: "The correction in US stocks on June 5 was superficially triggered by concerns over tightening liquidity due to strong non-farm payroll data, but fundamentally represented a clearance of overvalued assets. Market focus has shifted from capital expenditure to free cash flow, leading tech stocks to lead the decline. Highly leveraged long positions experienced a stampede as liquidity gates tightened. In the short term, the market is constrained by an earnings vacuum and lacks upward catalysts, but the long-term AI hardware narrative remains unchanged"
datetime: "2026-06-08T01:39:08.000Z"
locales:
  - [zh-CN](https://longbridge.com/zh-CN/news/288986020.md)
  - [en](https://longbridge.com/en/news/288986020.md)
  - [zh-HK](https://longbridge.com/zh-HK/news/288986020.md)
---

# How Long Will the US Stock Market Correction Last? How Much Retracement Can the US Government Tolerate?

**A Deep Dive into Why US Stocks Suddenly Retraced on June 5: Superficially, strong non-farm payrolls reinforced market concerns about tightening liquidity; fundamentally, it was a prudent clearance of high-valuation assets.** As shown in Figure 1, while the S&P 500 Index repeatedly hit new highs, internal imbalances were reaching extremes: 68% of its constituents had already retraced more than 10% from their previous highs, and 19% had fallen into a situation of retracing more than 40%. The index's continued rise was largely driven by the resonance of quantitative strategies and irrational prosperity formed by crowded long positions at high levels. As positive factors on the numerator side were cleared out and negative factors on the denominator side were gradually realized, a corrective retracement was inevitable.

So, why did US stocks fall at this time? How sustainable is the decline? What variables should be closely monitored for US stocks in the future?

## **Question 1: Why Did US Stocks Correct at This Time?**

When long-term faith lacks short-term cash flow support. The deep-seated reason for this US stock correction is the market's shift in focus from Capex to free cash flow, rather than merely Broadcom's earnings miss. In the past, institutions bet on rapid Capex growth because they firmly believed that "the more you invest, the higher the barrier to entry"; now, the market is beginning to clear the "erosion of free cash flow by high depreciation." Due to the lack of immediate cash flow realization on the numerator side, this round of US stock correction was mainly led by tech stocks.

**When macroeconomic data hits red lines, chips at high levels may complete a "stampede-style" clearance.** May's non-farm payrolls exceeded expectations, pushing the 10-year US Treasury yield back to 4.5%, suppressing forward P/E ratios across the entire market, and triggering liquidation of the semiconductor sector (SOX) by quantitative CTA and systematic strategies. The 10% retracement in the chip sector on June 5 was not solely a trade betting on tighter monetary expectations, but rather a "stampede" among previously extremely crowded leveraged long positions when liquidity gates tightened.

## **Question 2: How to View the Sustainability of the US Stock Correction?**

**Although the long-term hardware narrative of technological innovation may be far from over, the short-term earnings vacuum has left buyers confused due to a lack of empirical evidence.** While the "supply falling short of demand" pattern in memory chips is expected to continue in the medium to long term, the market generally finds it difficult to obtain micro-level data on "how AI converts giant capital expenditures into profits" in the short term. It is expected that at least until next week's Apple Worldwide Developers Conference, or even until the Q2 earnings disclosure period for US tech giants, the market may lack a trigger for upward movement.

**Additionally, as the market is in a "vacuum period" of physical capacity expansion, there may be short-term concerns about insufficient release of upstream profits.** Around 2024, global wafer fabs were in an intensive period of constructive capital expenditure. Constrained by the 2-3 year production lag for chips, the investments by major high-tech enterprises in chip wafer fabs have not yet seen a release in output. Before new chip capacities are delivered on a large scale, short-term corporate performance may struggle to exceed expectations, and US stocks may correct under the liquidity conditions of high US Treasury yields hovering at elevated levels.

**US stock gains may need to wait for further release of potential risks.** Since the Federal Reserve slowed its rate hikes in 2023, the continuous upward path of US stocks has been quite similar to that of 1995-1998. Currently, the US stock market "mirror image" corresponds more to around July 1998. From July to September 1998, driven by the bankruptcy of LTCM and the Russian sovereign credit crisis, the Nasdaq Index once retraced more than 30%, but the subsequent release of tech stock performance "laid the foundation" for the continuous rise of US stocks in 1999.

Returning to the present, US stocks are in an earnings "window period" for the next 1-2 months. Coupled with the US-Iran conflict driving up US inflation expectations, the short term is at the intersection of intensive releases of US macroeconomic data and "intensive commentary" from Federal Reserve officials. US stocks may face pressure in the short term due to rising expectations of rate hikes.

## **Question 3: How Much Retracement in US Stocks Can the US Government Tolerate?**

**On one hand, once the paper wealth effect reverses, the "invisible hand" of the White House and the Federal Reserve may take action earlier.** Assuming the US marginal propensity to consume (MPC) is 3%-5%, if the S&P 500 Index retraces more than 10%, under neutral assumptions, it means US consumption in Q2 2026 may slow down by 1.6%. 2026 is a "midterm election year." Once the US stock retracement approaches the sensitive range of more than 10%, the US Treasury Department is likely to release liquidity by actively adjusting the TGA account.

**On the other hand, the negative drag of asset price declines on consumption may be greater than the positive pull of increases.** When the S&P 500 Index quickly retraces more than 20% and enters a technical bear market, residents' willingness to save may increase significantly. The drag effect of wealth evaporation on the stock market may align with pessimistic assumptions, implying a potential possibility of negative growth in US personal consumption expenditure in a single quarter of 2026.

**In summary, we believe that a 10% correction in US stocks may be the tipping point for the US government to take action, while around 20% may be the limit for US stock retracement.**

**If the US stock correction continues to deepen, the upside potential of the "TACO" trade is expected to expand accordingly.** Previously, during tariffs (February-June 2025) and the early stage of the US-Iran conflict (March-April), due to the difficulty in anchoring the uncertainty premium, the maximum retracement of the S&P 500 Index was relatively long, and the repair cycle was slow. Considering that the US-Iran conflict is still ongoing, once US stocks experience a significant retracement of more than 10%, the Trump administration's willingness to engage in "TACO" during the midterm election year may continue to strengthen.

## Question 4: With US Treasury Yields and Inflation Continuing to Rise, Can They Continue to Pressure US Stocks?

**Approaching the Inflation Red Line: CPI "Breaking 4%" May Trigger Monetary Tightening Warnings.** When nominal inflation crosses the key threshold of 4% (it reached 3.8% in April), it often means that the liquidity dividend on the denominator side is entering a phased end, and the absolute return rate of equity assets may face downward pressure. Since 1934, the average return of the S&P 500 Index within 3 months after CPI broke through 4% was -5.4%, highlighting the short-term suppressive effect of high inflation on the equity market.

**In terms of style, the market may accelerate rotation towards value defense, and tech stocks may face short-term pressure.** After US CPI year-on-year breaks through 4%, the probability of the Nasdaq underperforming the S&P 500 in the next 3 months is as high as 75% (since 1973); even in samples where the Nasdaq had positive returns, the absolute value of the maximum retracement during the period exceeded the gain itself, reflecting to some extent the uncertainty and fragility of growth factors in a high-inflation environment.

**More worth noting is that inflation trading may increase the risk premium of US stocks.** After CPI year-on-year breaks through the 4% critical point, the positive correlation between the 10-year US Treasury yield and US stocks may weaken significantly, or even turn negative. If inflation rises rapidly subsequently, triggering heating in "NACHO" trading, the central level of risk-free rates may continue to shift upwards, and US stock valuations may face certain pressure on the denominator side.

**High US Treasury yields may continue to suppress US stocks on the denominator side, reflecting that blind chasing of highs is "not worth the loss."** When the 10-year US Treasury yield breaks upwards through 4.6%, the short-term allocation cost-performance of US stocks may be "insufficient." Historically on average, the expected gain of the S&P 500 for the next 3 months is only 2.9%, yet it has to withstand a maximum retracement of -5.9%; although the Nasdaq has an average gain of 6.6%, it is also accompanied by severe volatility of -8.8%. This reflects that in a high-interest-rate environment, blindly chasing highs may ultimately be "not worth the loss."

**In summary, as US Treasury yields and US stock returns become negatively correlated, the continuous rise in US Treasury yields and inflation may continue to weaken the short-term allocation value of US stocks.**

## Question 5: What Potential Negative Factors Should Be Monitored Within the Year?

**In a market with relatively limited liquidity, intensive financing by tech giants may be gradually consuming the remaining liquidity of US stocks.** Google's huge refinancing and mega IPOs like SpaceX may create a certain fund siphon effect in the short term. According to the standard 90-180 day lock-up period, a large wave of unlocking may arrive from the end of Q3 to Q4. The deeper logic lies in the transformation of big tech companies from "asset-light" to "high-leverage computing power arms race" heavy assets, making their performance and cash flow more sensitive to interest rates.

**Another gray rhino completely ignored by the market is the micro-level "anti-AI wave."** As shown in Figure 12, the profit-to-investment ratio of US AI in 2025-2026 is continuing to decline, reflecting to some extent that the resistance of US small and medium-sized enterprises (SMEs) to purchasing AI services is taking effect. The possible transmission path is: SMEs reduce AI service expenses -\> AI vendors' input-output ratio declines -\> AI vendors shrink Capex -\> The market's pricing paradigm for AI changes.

Risk Warning and Disclaimer

The market carries risks, and investment requires caution. This article does not constitute personal investment advice, nor does it consider the specific investment goals, financial status, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this content is at your own risk.

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