Wall Street institutions warn: Economic resilience combined with the AI wave makes shorting U.S. stocks a high-risk trade

For investors attempting to short the U.S. stock market in the current environment, this is becoming an increasingly dangerous trade.

According to data analytics firm S3 Partners, in the last week of November, U.S. short sellers faced approximately $80 billion in market-capitalization losses, nearly wiping out the nearly $95 billion in paper profits they had accumulated over the previous three weeks.

The unexpected resilience of the U.S. economy, combined with the AI investment boom, is collectively building a strong fundamental backdrop that supports corporate earnings prospects and may drive the stock market higher.

Market sentiment and capital flows also show a clear shift. Data from Goldman Sachs' prime brokerage division indicates that hedge funds are closing their short positions on U.S. indices and ETFs at the fastest pace in five months.

Meanwhile, the market widely expects the Federal Reserve may cut interest rates at its next policy meeting to stimulate economic activity, further weakening the rationale for shorting.

Wall Street firms, including 22V Research, warn that shorting U.S. stocks requires extremely high confidence until there is a substantial deterioration in the economic backdrop or a significant change in the outlook for AI capital expenditures. As investors continue to buy on dips, any market pullback could be quickly reversed, amplifying the risks for short sellers.

Short Sellers Encounter "Strangulation," Losing $80 Billion in a Single Week

The market performance in November provided a painful lesson for short sellers.

Ihor Dusaniwsky, Managing Director of Predictive Analytics at S3 Partners, stated that short sellers experienced "repeated strangulation" in November, with most of the profits they earned in the first three weeks nearly fully reversed in the last week. This single-week loss of up to 4.8% highlights the risks of going against the trend in the current market environment.

This "violent reversal" forced short sellers to cover their positions. Dave Mazza, CEO of Roundhill Investments, pointed out:

November was originally one of the worst-performing months in decades, but it turned upward, and this dramatic reversal forced short sellers to close their positions.

A typical case is the performance of Beyond Meat. The company's stock price surged nearly 37% on Monday without any significant news, demonstrating the substantial volatility that short covering can bring. Mazza commented:

The cost of holding short positions can rise rapidly.

Since April, regardless of macroeconomic changes, every market decline has attracted retail and institutional investors to "buy on dips," making shorting exceptionally difficult.

Strong Economic Fundamentals Support Corporate Earnings Prospects

Despite concerns about inflation and a softening labor market, the fundamentals of the U.S. economy remain strong, particularly in the consumer sector.

According to Mastercard SpendingPulse, consumer spending on this year's "Black Friday" increased by 4.1% year-over-year, indicating that the strength of American consumers remains solid. Strong consumer spending will ultimately translate into corporate profits. According to data from Strategas Asset Management, the market predicts that corporate profits will grow by 12.5% over the next 12 months.

Strategists at 22V Research believe that the growth in consumer spending and investments in the AI sector are expected to support productivity improvements, enabling companies to achieve the profits necessary to drive stock price increases.

Additionally, expectations regarding macro policies are also trending positively for the stock market.

Market traders anticipate that the Federal Reserve will cut interest rates at next week's meeting, a move that will further stimulate economic activity. A quantitative model from 22V Research has even switched to a "full bull" signal.

The AI Investment Boom and Seasonal Positive Factors Cannot Be Ignored

In addition to economic resilience, the ongoing enthusiasm surrounding artificial intelligence is another key pillar supporting the market.

Dennis Debusschere, co-founder and chief market strategist at 22V Research, noted in a report that current short positions need to meet at least one of two premises: a high level of confidence that the economic backdrop will significantly weaken, or a major change in the outlook for AI-related capital expenditures.

From market behavior, investors tend to view AI as a long-term growth driver, maintaining enthusiasm for investments in related fields. This sentiment, combined with the aforementioned "buying on dips" trading strategy, forms a strong market support force.

Historical data is also unfavorable for short sellers. Traders are entering a seasonally bullish period for the stock market.

According to LPL Financial, historically, December is the best-performing month for the S&P 500, with an average increase of 1.4%, and 73% of years recording gains in December, the highest probability of increase among all months.

Data shows that this upward momentum typically begins to manifest in the latter half of the month, with upward momentum often starting to accumulate around the 11th trading day.

Overall, from the perspectives of fundamentals, market sentiment, and seasonal patterns, the current situation is unfavorable for short sellers, making shorting U.S. stocks a high-risk operation