While U.S. stocks have risen 18% since late March, short interest—bets on share-price declines—has also climbed to an all-time high. Bloomberg reported on the 20th (local time) that investors skeptical about whether the flood of investment in artificial intelligence (AI) will translate into real profits are not pulling back from bearish wagers even in a rising market.
According to market research firm S3 Partners, short interest in Standard & Poor's (S&P) 500 stocks is now approaching 3.79% of the free float. That is near a record high since tracking began in 2010. The free float refers to shares that investors can actually trade, excluding holdings that rarely come to market, such as stakes held by major shareholders. Across the Russell 3000, which covers most U.S. listed shares, the ratio rose to 6.3%, a record high. Ihor Dusaniwsky, S3 Partners' predictive analytics manager, said, "Short selling has surged, and the range of stocks targeted by short sellers has broadened."
Short selling is an investment strategy in which an investor borrows shares and sells them first, then buys them back more cheaply after the price falls to return them. If you borrow and sell a 100,000-won stock, then buy it back at 70,000 won, you pocket 30,000 won. Conversely, if the share price rises to 150,000 won, you lose 50,000 won. Short interest refers to the unclosed positions still piled up in the market after selling borrowed shares and not yet buying them back.
Reynolds Strategy's tally shows that short interest in New York Stock Exchange (NYSE) listed shares has increased since February, jumping to 9% of shares outstanding as of the end of June. That is a record high, surpassing about 5% during the global financial crisis and about 6% during the COVID-19 spread. Experts said short interest spiked as doubts grew over the profitability of AI investments. Major big tech companies listed in the U.S. stock market are currently pouring massive funds into data centers, AI Semiconductor, and power infrastructure. Bloomberg reported that investors have begun to ask not about the scale of their expenditure, but when the capital already committed will translate into sales and profits. On top of that, competition has intensified recently as Chinese companies roll out cheaper AI models and services.
According to Bespoke Investment Group, the stocks with the highest short interest in the Russell 3000 fell an average of 15% this year. In contrast, the rest of the stocks rose by nearly 21% on average. The Russell 3000 index itself, which includes all corporations, is up 9.3% this year. In particular, widely shorted names this year—such as rental car giant Hertz Global Holdings, Eos Energy, Once Upon a Farm, and Dave & Buster's—have seen sharp swings. Hertz shares are down 65% so far this year alone. About 79% of Hertz's free float has been sold short.
Large tech stocks with surging revenue this year have also become frequent short targets. In S3 Partners' data, heavily shorted names include the so-called Magnificent 7—Apple, Nvidia, and Microsoft—as well as semiconductor corporations such as Micron Technology and Broadcom. SpaceX, which listed on the 12th of last month, rose to No. 9 by short interest on the U.S. stock market on the 17th. S3 Partners estimated that short positions in SpaceX have produced a mark-to-market return of nearly 28% this year, with mark-to-market gains reaching $4.8 billion (about 7.14 trillion won). Mark-to-market gains are book profits calculated at the current share price before buying back to close the position.
Joseph Saluzzi, partner and co-head of equity trading at Themis Trading, told Bloomberg on the 20th that "the rise in short interest is a signal of investor concern," adding, "As AI expenditure and semiconductor stock prices swung widely, investor skepticism grew." He said, "Marketwide fear is still contained," and "earnings season and geopolitical concerns will be major variables for the rest of this month."