Short Interest Hits Record High, Can the US Stock Market Bull Run Continue?

TL;DR

· S3 data shows that the short interest in the US stock market has risen to a record level, and tech stock unwinding is also increasing.

· This looks more like a high-level hedge, not a signal of a bull market reversal; earnings reports will determine the direction of volatility.

· Related Tickers: SPX, NDX, XLK, SMH, NVDA, Mag 7.

While the S&P 500 continues to trade at high levels, the short interest in the US stock market and hedge funds reducing their tech holdings are both increasing, prompting the market to reassess the safety margin of AI trading.

These signals have made investors nervous because they run counter to the main narrative of the past two years. While AI has been driving the index higher, institutions have been buying more insurance on this trade. The concern is not just whether the US stock market has peaked, but whether bad news will be magnified after prices have factored in a lot of optimistic expectations.

Let's first clarify the concept. Short interest is the proportion of borrowed shares sold short to the total tradable shares. It may represent a direct bet on a decline or simply a hedge. Funds still hold long positions but use short selling, options, or reductions to mitigate downside risk.

Therefore, a record high short interest does not automatically mean that institutions are bearish across the board. A more accurate statement would be that the US stock market is still trading on the long-term returns of AI, but institutions have begun to reprice short-term volatility.

Short Interest Increases Even as the Index Rises

Rising prices and increasing short interest may seem contradictory but often occur simultaneously. Especially when valuations are high, positions are crowded, and earnings season is approaching, funds will maintain long positions while increasing protective positions.

According to media citing S3 Partners data, the short interest in S&P 500 constituents represents approximately 3.79% of free float shares, a new high for S3 since 2010. The same metric for Russell 3000 constituents is around 6.3%, also at a record high.

These numbers cannot be simply added to other metrics. Different institutions have different statistical scopes, and what exchanges disclose is more about the number of shorted shares rather than a unified ratio indicator. The metric disclosed in July by the New York Stock Exchange shows that as of June 30, 2026, the total shorted shares of the NYSE Group increased from the previous period, indicating an expanding short position.

A client report from Goldman Sachs Prime Brokerage also points in a similar direction. According to Reuters on July 6, U.S. hedge funds have been net selling tech hardware and semiconductors for the fourth consecutive week, and the information technology sector has been the most net-sold U.S. sector for the fourth consecutive week.

The key here is not a precise percentage, but that large players are reducing their tech net exposure. The market is not experiencing a collective retreat; retail buying, corporate buybacks, and trend fund support are still propping up overall prices, but the cushion during the rally has thickened.

AI Trading Enters the Bad News Amplification Phase

Institutions are not concerned that AI has no value, but rather that the current prices have already priced in much of the future returns.

Over the past few years, the core explanation for the U.S. stock market's rise has been AI. Cloud providers and tech giants have ramped up capital expenditures, Nvidia and the semiconductor chain have enjoyed order overflow, and the market believes that these investments will ultimately translate into revenue, profit margin, and productivity gains.

For investors, capital expenditure is not the story itself but an investment that needs to yield returns. If AI infrastructure investment continues to rise but end-market revenue, enterprise spending, and profit contributions do not accelerate in sync, valuations will come under pressure first.

Semiconductors are the most likely to become a volatility amplifier. They are at the forefront of the AI investment chain, with orders and expectations reacting the fastest, and valuations being the most sensitive. Once earnings reports show slowing order growth, margin pressure, or concerns about customer concentration, the market often first compresses semiconductors, then transmits this to the Nasdaq and S&P.

Geopolitical risks serve as external catalysts. Events like conflict in the Middle East, energy prices, and supply chain uncertainties may not alter AI's long-term demand but can change how much of a multiple the market is willing to pay for high-valuation assets. At market peaks, what the market fears most is not bad news but crowded positions when bad news arrives.

This explains why the increase in short positions is more akin to a rise in insurance premiums. Institutions may not necessarily believe that the AI bubble will burst, but they are unwilling to expose too much of their positions to earnings reports and external risks.

Morgan Stanley's Dual-Track Judgment

Morgan Stanley's recent strategic framework perfectly illustrates the core of this current divergence. There may still be an upward scenario in the medium term for the indices, but tech and semiconductor sectors may need to digest their gains in the short term.

On July 14, Morgan Stanley strategist Mike Wilson mentioned in an official podcast that semiconductors may pull back, and there might be volatility and corrections before the next bull market advance. On July 15, a Morgan Stanley Wealth Management article mentioned that its Global Investment Committee expects the S&P 500 to rise to 8000 to 8300 points in the next year while also advising profit-taking in the semiconductor sector.

This is not simply a matter of bullishness or bearishness, but a dual-track judgment commonly seen in a high-level market. In the long term, if profits continue to rise and AI investment brings in real income, the index can continue to rise. In the short term, if valuation expansion outpaces performance, a pullback may also occur.

For investors, do not interpret position signals as one-way predictions. Increased short positions may turn into short squeezes after positive earnings reports, with short sellers and hedgers forced to cover their positions, thereby driving up prices. Conversely, it may amplify a downturn when bad news emerges.

What determines the direction is not the sheer volume of short positions, but when the catalyst lands, whether the market discovers that previous valuation assumptions were too conservative or too optimistic.

Earnings Reports Determine Whether Shorts Are Fuel or Pressure

The upcoming earnings reports from tech giants and semiconductor companies will serve as a stress test for AI trading. The market will not focus on a mere statement of "strong demand," but rather on whether cloud revenue, AI orders, gross margins, and capital expenditure returns can align with each other.

If the earnings report shows that cloud revenue continues to accelerate, AI orders remain robust, and gross margins stay steady, short positions may turn into upward momentum. Short sellers or hedgers will need to cover their positions, and chasing funds will reconfirm the AI trend.

If the earnings report only proves that capital expenditure is expanding but fails to demonstrate synchronous returns, the market will reassess the idea of paying a high valuation for future growth. At that point, short positions will not be the cause of a decline but will act as a volatility amplifier.

The more reasonable assessment currently is not that the bull market is ending or that shorts are bound to get squeezed. The U.S. stock market is entering a more discerning stage. The AI narrative remains valid, but valuations need to continue to deliver through earnings reports. Semiconductors still underpin the core theme and are in the frontline for a risk reevaluation.

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