"AI bubble panic" triggers a "quick freeze" of technology stocks! Traders bet heavily on a major shake-up in US stocks, but Wedbush is calling it the time to buy low.

Due to the resurgence of panic over the "artificial intelligence (AI) bubble," popular AI computing infrastructure stocks that have led global stock markets to new highs this year collectively plummeted, causing a significant drop in global stock markets on Tuesday, which can be described as a "Black Tuesday." The KOSPI Composite Stock Price Index in South Korea closed down 9.99%, with SK Hynix plummeting 12.47% and Samsung Electronics falling 12.31%; the Nikkei 225 Index dropped 3.55%; and major stock indices in A-shares and Hong Kong also trended lower. Related stocks in the U.S. were also dragged down. Before the opening of the U.S. stock market on Tuesday, semiconductor stocks fell, with NVIDIA Corporation (NVDA.US) falling about 3%, Broadcom Inc. (AVGO.US) dropping over 4%, AMD (AMD.US), Qualcomm (QCOM.US), and Intel Corporation (INTC.US) all falling over 6%. Stocks of storage chip companies such as Micron Technology, Inc. (MU.US) and SanDisk (SNDK.US), as well as optical communication stocks like Marvell Technology, Inc. (MRVL.US) and Coherent (COHR.US), also declined before the market opened. In addition, large-scale cloud service providers that operate large cloud computing platforms and data centers saw their stock prices weakenOracle Corporation (ORCL.US) fell over 2%, Alphabet Inc. Class C (GOOGL.US) dropped nearly 2%, Amazon.com, Inc. (AMZN.US), Meta Platforms (META.US) fell nearly 1%, while Microsoft Corporation (MSFT.US) rose by approximately 1%. The root cause of this sell-off lies in the market's reassessment of the sustainability of the AI investment frenzy. In the past few quarters, tech stocks have soared thanks to the AI investment craze, but with borrowing costs remaining high, investors are beginning to question whether companies can convert their significant AI capital expenditures into actual profits. Kiran Ganesh, Global Head of Investment Communications at UBS Group AG, warned that if companies continue to finance AI investments through debt and the related investments have not generated sufficient returns, the market may begin to question the companies' debt structures and profitability sustainability in the future. In this backdrop, different reactions have emerged from various market participants. Investment bank Wedbush remains bullish on AI tech stocks and points out that the sell-off on Tuesday provides a buying opportunity for storage chip and semiconductor stocks. Meanwhile, options market traders have been heavily buying call options on the Cboe Volatility Index (VIX), betting on a sharp increase in volatility in the U.S. stock market. This move echoes a warning from the Morgan Stanley strategy team led by star analyst Mike Wilsonthe team believes that with liquidity tightening expected from the Fed's balance sheet reduction, combined with a peak in earnings revisions growth rates, the U.S. stock market will experience severe volatility. Wedbush rallies AI tech stocks: sell-off provides buying opportunity Regarding the sharp drop in storage chip stocks represented by SK Hynix and Samsung Electronics on Tuesday, the Wedbush analyst team led by Dan Ives stated, "Just a day after SK Hynix surpassed Samsung Electronics to become the highest market value listed company in South Korea, and the KOSPI index recently hit a historic record of 9000 points, the tech-heavy index fell by about 10% today and triggered a circuit breaker during trading. Clearly, this will bring selling pressure to U.S. tech stocks and make investors highly nervous, as the market is concerned that the adjustment following the overheating of the South Korean stock market will spread to the U.S. tech sector." The analysts pointed out that the KOSPI index has risen by about 90% since the beginning of the year, embodying an important manifestation of the global AI frenzy, with SK Hynix and Samsung Electronics being the core "crown jewels" of the South Korean AI bull market over the past 18 months. They noted that as Micron Technology, Inc. is about to report its earnings, the market has become more cautious about the key investment theme of storage chips, and technical trigger factors have further intensified the anxiety of tech investors. At the same time, the sharp decline in the stock price of tech giant Alphabet Inc. Class C amid the shift from an "optimistic premium" narrative to a "return skepticism" narrative, combined with the direct catalyst of talent exodus, has further amplified market concerns. However, Wedbush remains bullish on AI tech stocks. In their view, the sharp decline in storage chip and semiconductor stocks related to AI provides a buying opportunity. The Ives team stated, "Our recent research on the industrial chain in Asia and tracking of corporate AI demand over the past few months show that demand has continued to accelerate, with no cracks appearing, which is also a key reason why we continue to firmly believe in TAL Education Group Sponsored ADR Class A as a one-year AI tech leader." The analysts added, "We believe that this decline in the KOSPI index is more like a callback and breather after the nearly 100% rise this year. In addition, SK Hynix surpassing Samsung has significant symbolic significance, causing some investors to start worrying about an overheated storage chip trading. However, we strongly disagree with this view, as in the wave of tens of trillions of dollars of global AI infrastructure construction in the coming years, what will ultimately determine market performance is still profitability, demand, and scarcity value." Traders frantically buying VIX call options, betting on sharp stock market volatility For U.S. stock market traders, the summer trading season has officially begunthere is a low probability of an economic recession, negotiations between the U.S. and Iran are ongoing, U.S. corporate profits have hit record highs, and trade policies have not yet sparked significant concerns. However, the market trends on Tuesday once again highlighted the fragility of the upward trend driven by AI. Before the market decline on Tuesday, options traders were already preparing for a round of volatility. Using the ratio of open interest in call options on the Cboe Volatility Index (VIX) relative to put options as an example, this indicator has reached its highest level since the beginning of the year, indicating a significant increase in market demand for downside protection against a decline in the S&P 500 index. This ratio even exceeded the levels seen in early February when concerns about the conflict in the Middle East pushed Wall Street's main implied volatility index significantly above 20, a level typically considered an important warning line for increased market pressure. After a sharp rise during the initial outbreak of the Middle East conflict, the premium of the VIX relative to the actual volatility of the S&P 500 has narrowed significantly. With recent increased volatility in the S&P 500 index, traders may now be willing to pay a higher cost to purchase risk protection. Chief Investment Strategist at PNC Asset Management Group stated, "For stock traders, the bigger concern is that the market may not have much time to wait for the situation to resolve itself before the Fed is forced to raise rates." He added, "For the past two decades, the Fed has always communicated policy signals through 'forward guidance' to the market, and traders are currently going through a large-scale readjustment process, so the market could be quite choppy in the coming months." The VIX index, which reflects market expectations for volatility in the next month, is currently around 17, which, from an absolute level, is not yet enough to send a clear signal of danger. The VIX futures curve has also returned to a more normal "contango" structure, where far-month contracts are priced higher than near-month contracts. Even though a temporary peace agreement has been reached between the U.S. and Iran, the market is evidently preparing for potential sharp volatility in the future. Recent strong statements on inflation from Federal Reserve Chair Powell have sparked widespread reactions in the financial markets. Traders are now generally expecting the Fed to start raising rates as early as October after consumer prices have seen their fastest increase in three years, in order to curb inflation. Adam Phillips, Director of Portfolio Strategy at EP Wealth Advisors, said, "Many investors seem to see this temporary U.S.-Iran agreement as a 'green light' to buy stocks again, but we do not see it that way." He added, "This won't change the interest rate outlook. The Fed is unlikely to cut rates in the short term, and may not even do so this year. Therefore, traders have to readjust their expectationsborrowing costs and inflation could remain high for quite some time." This is also the challenge facing large tech stocks in recent months. Since the end of March, investors have been chasing after large tech giants, driving the S&P 500 index to increase by about $10 trillion in market value and continue reaching new highs. This has made the valuations of the mega-cap tech stocks driving this current surge seem increasingly expensive, and market positions are at elevated levels. Phillips stated that his firm currently has a neutral view on stocks, is underweighting tech stocks due to their high valuations, and is overweighting energy and industrial stocks to hedge against the risk of high oil prices. Charlie McElligott, Cross-Asset Strategist at Nomura Securities, said, "The danger is that if the market sees the so-called 'U.S.-Iran agreement' as an opportunity for Powell to observe and confirm or deny whether inflation is just a temporary phenomenon using summer data. Then if inflation does not fall back, the possibility of the Fed being forced to undertake 'compensatory rate hikes' in the future will increase." In the past 12 weeks, the S&P 500 index has seen gains in 11 weeks. In the week ending last Wednesday, investors poured a net $119.2 billion into U.S. stock funds. According to data cited by Bank of America from EPFR Global, annualized, the U.S. stock market is expected to attract a record $739 billion in fund inflows by 2026. Currently, the S&P 500 index is less than 2% away from its all-time high. With earnings season still a month away, and the S&P 500 index breaking through the important psychological barrier of 7500 last Friday, the market lacks new catalysts to drive a significant upward or downward movement in stocks. Following the Federal Reserve's interest rate meeting last week, investors are now turning their attention to the U.S. personal consumption expenditure (PCE) price index for May set to be released on Thursdaywhich is the inflation index most closely watched by the Fed. Earlier, Fed officials' rate predictions had notably shifted to support rate hikes. Therefore, any inflation data exceeding expectations could disrupt the recent rebound pace of the S&P 500 index. Phillips added, "We are not worried about the stock market or the economy itself. But there is a feelingwe are always looking back and worrying that some problems lurking around the corner may suddenly emerge, weaken economic growth, corporate profit growth, and ultimately drag down stock prices." Morgan Stanley warns: Two major factors may trigger a stock market plunge In the midst of the resurgence of panic over the "AI bubble," investors are searching for signals to determine whether the upward trend driven by AI still has momentum. Like the traders frantically buying VIX call options, the strategy team led by star analyst Mike Wilson at Morgan Stanley believes that as the Fed's liquidity tightening is expected from the Fed's balance sheet reduction, combined with a peak in earnings revisions growth rates, the U.S. stock market will see severe volatility, and the Fed is unlikely to come to the market's rescue. Mike Wilson, as Morgan Stanley's Chief U.S. Stock Strategist, believes that nominating Powell was the right choice to rebuild the market's confidence in the Fed, as credibility is the key factor in whether the government can rely on economic growth to resolve debt issues. After Powell's nomination was announced, the ratio of the S&P 500 index to the price of gold rose by 40%, "In short, if restoring damaged credibility to policymakers is the policy objective, then nominating Powell is the right choicethe price movement of precious metals earlier this year and over the past decade has already proven this." The strategy team stated that the truly difficult stage has arrived. Powell did not talk much about the Fed's balance sheet operations, but balance sheet management is one of the five special task groups he set up to study; however, the growth rate of the Fed's balance sheet has already turned downward. The Fed will reduce the monthly reserve reduction scale from $400 billion to $100 billion, while the Treasury Department's repurchase scale will be reduced by about 50%, combined with a continued increase in credit investment growth. The strategists added, "Taking all factors into consideration, market liquidity has indeed entered a tightening channel, and unless there is a run on the money market, a sharp spike in U.S. Treasury bond volatility, or a liquidity breakdown in the credit market, the trend of liquidity tightening will be difficult to reverse. In other words, the biggest short-term risk to U.S. stocks comes from liquidity tightening, not the market's concerns over the Fed's rate hikes to combat inflation." As liquidity continues to decline, the speed of institutional upward revisions in future corporate earnings has also peaked and is now trending downward. Morgan Stanley warns that the market may test whether Powell's policy promise of "bearing short-term pain for long-term economic stability" in the coming weeks. Micron Technology, Inc. earnings validate the "AI quality" Amidst the uncertainty, the upcoming earnings report from Micron Technology, Inc. will serve as the first litmus test to validate the demand for AI hardware. Typically, the end of June is a period devoid of earnings reports, with major core companies having already disclosed their quarterly performance several weeks or even months ago. However, this year Wall Street is eagerly awaiting a key highlight, as Micron Technology, Inc. became a hot target in the market over the past year, with the company's revenue and profit expanding explosively, exerting a growing impact on the weighting of the S&P 500 index. Benefiting from the demand for storage chips driven by AI computing power, prices of storage products have spiked, leading to exponential growth in Micron Technology, Inc.'s profitability. Analysts at FactSet estimate that Micron Technology, Inc.'s adjusted earnings per share for the last quarter could reach $20.57, nearly a 1000% increase year-on-year. Morningstar analyst William Coleman stated, "Micron Technology, Inc.'s growth over the past 12 months has been phenomenal. The tight supply of storage chips has pushed up product prices, and almost all incremental business growth for the company has been converted into net profit." The core reason behind Micron Technology, Inc.'s rising earnings is largely due to product price increases rather than additional cost investments. In the current scenario where sector valuations are high and investors are concerned about the extent of the current surge being overextended, the earnings report from Micron Technology, Inc. on Wednesday holds significant importance. If the earnings report signals strong underlying demand, continued high growth in AI-related capital expenditures, it will boost market confidence in the long position and support the continuation of the AI bull market. Steve Coronado, Chief Investment Officer at Integrated Partners, stated that Micron Technology, Inc.'s earnings report could create a typical cyclical rebound market, "The AI race is the market's only main theme right now. By observing the order shipment ratio and backlog orders of semiconductor companies, it is clear that the demand for chips far exceeds the existing production capacity." Data from FactSet shows that in the second quarter, NVIDIA Corporation and Micron Technology, Inc. will be the two main contributors that drive the overall profit growth of the S&P 500. John Bartes, a senior profit analyst at FactSet, found that removing NVIDIA Corporation and Micron Technology, Inc. from the equation, the overall projected profit growth of the S&P 500 would drop significantly from 22% to 14.9%. Stifel investment bank analyst Brian Qin noted that Micron Technology, Inc. is in the golden window of the storage industry's period of expansion cycle, with the current period of prosperity intensity surpassing any previous cycle in history. In this context, Micron Technology, Inc.'s role in driving the overall profit momentum of the U.S. stock market will peak in this phase.