Wall Street institutions warn: Economic resilience combined with the AI wave is turning short-selling U.S. stocks into a high-risk trade.

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

According to data analytics firm S3 Partners, in the final week of November, U.S. stock short sellers suffered approximately $80 billion in mark-to-market losses, nearly wiping out the roughly $95 billion in paper profits accumulated in the previous three weeks.

Resilient U.S. economic performance exceeding expectations, combined with the AI investment boom, are together forming a strong fundamental backdrop supporting 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 short positions on U.S. stock indices and ETFs at the fastest pace in five months.

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

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

Short sellers face a “squeeze,” with $80 billion in weekly losses

November’s market performance provided a painful lesson for short sellers.

Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, says shorts suffered repeated “squeezes” in November, with most of their profits from the first three weeks nearly all given back in the final week. This single-week loss of up to 4.8% highlights the risks of trading against the current market trend.

This kind of “violent reversal” has forced shorts to cover positions en masse. Dave Mazza, CEO of Roundhill Investments, notes:

November was on track to be one of the worst months in decades, but it turned upward. This sharp reversal has forced shorts to close positions.

A typical example is the performance of Beyond Meat. On Monday, the company's stock price soared nearly 37% absent any clear news, showing the outsized volatility short covering can produce. Mazza commented:

The cost of holding bearish positions can rise rapidly.

Since April, regardless of changes in the macro environment, every market dip has attracted “buy-the-dip” demand from both retail and institutional investors. This kind of “reflexive buying” has made shorting unusually difficult.

Robust economic fundamentals support corporate earnings outlook

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

According to Mastercard SpendingPulse data, this year’s “Black Friday” consumer spending rose by 4.1% year-over-year, indicating U.S. consumers remain resilient.

Strong consumption will ultimately feed through to corporate profits. Strategas Asset Management data shows that the market expects corporate profits to grow 12.5% over the next 12 months.

Strategists at 22V Research believe growth in consumer spending and AI sector investment are poised to support productivity gains, enabling companies to achieve the earnings growth needed to push stock prices higher.

In addition, macro policy expectations are turning increasingly favorable for equities.

Market traders expect the Fed to cut rates at next week’s meeting, further stimulating economic activity. A quantitative model from 22V Research has even switched to a “full bullish” signal.

AI investment craze and seasonal tailwinds cannot be ignored

Beyond economic resilience, continued enthusiasm around artificial intelligence is another key pillar supporting the market.

Dennis Debusschere, co-founder and chief market strategist at 22V Research, notes in a report that shorting right now requires at least one of two conditions: strong conviction that the economic backdrop will weaken significantly, or a major change in the outlook for AI-related capital spending.

Based on market behavior, investors tend to view AI as a long-term growth driver, and their enthusiasm for investing in related sectors remains undiminished. Coupled with the “buy-the-dip” strategy mentioned above, this forms a powerful market support.

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

According to LPL Financial data, December has historically been the best month for the S&P 500, with average gains of 1.4%, and 73% of years seeing gains in December—the highest proportion for any month.

Data show that this upward momentum typically begins in the second half of the month, often starting to build around the 11th trading day.

In summary, from fundamentals to market sentiment and seasonal patterns, conditions are currently unfavorable for short sellers, making shorting U.S. equities a high-risk proposition.

Risk Warning and DisclaimerThe market involves risk, and investments must be made cautiously. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Investment decisions based on this article are the user's own responsibility. ```