Who will end the AI bull market, positioning or narrative?

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The stronger the market rises, the harder it is to find reasons for a decline—but the risks haven’t disappeared, they’ve just gone deeper underground.

On May 14th, Bloomberg market analyst Jon-Patrick Barnert pointed out that while the current U.S. stock rally has clearly extended, the cost and timing of shorting remain hard to gauge. More troubling is that now even the "best reasons to short" have become blurry.

The central contradiction of this rally is: Positions are extremely crowded, but the fundamental narrative—especially AI—continues to buoy market sentiment. Which will crack first?

Positions: The Market is Close to “Fully Long”

From a pure price trend perspective, signals of a correction are already quite obvious.

The S&P 500's consecutive gains over the past six weeks have not only formed one of the longest rallies in more than 70 years, but the magnitude of the increase is also among the strongest in history. Barnert says, "Taking a breather" would be perfectly normal for this market.

Goldman Sachs’ Risk Appetite Indicator has climbed back to 1, the first time since the beginning of the year. It is extremely rare for this indicator to exceed 1, and historically this has often indicated a potential correction. The last time it broke this threshold was in 2021, after which the market entered a bear phase.

Looking at the most popular theme stocks, Barnert describes this as a market where "everything is overbought," with some of the hottest sectors reaching extreme levels of overbought conditions. Combined with mechanical inflows—which now appear at or near their maximum long positions—the overall picture is: upside is limited, and the potential pressure for a position reset is immense.

But shorting isn’t easy. Barnert notes that position adjustments may occur within a single day, making the timing of entering and exiting short trades extremely difficult. If instead the market opts for a slow decline, volatility-related positions could quietly become ineffective in a mild environment. More likely is this: with bullish sentiment still prevailing, once shorts are forced to cover, it could trigger a new round of short-squeeze, rallying even faster than anyone expects.

Capital flows in some popular ETFs have started to show subtle changes—leaning toward "locking in profits" instead of "chasing highs." But Barnert also admits this trend has lasted several weeks and has not yet had a substantial impact on the market.

Narrative: Without AI, the Market is Nothing

If positions are a technical hidden risk, the narrative side currently looks even more solid.

Barnert points out that there are currently no clear signals triggering a fundamental bear market. Corporate earnings remain strong, inflation expectations have edged up but haven’t reached extreme levels. The market has digested high oil prices and Middle East tensions, and the latest U.S. employment data has eased recession fears. As for rate hike expectations, those have long ceased to be a market suppressor.

But one issue cannot be ignored: the current degree of market concentration has become extremely concentrated on "concentration itself."

Barnert points out that whether comparing performance of indexes with or without AI, or breaking down sources of gains since March, all conclusions point the same way: Without AI, the market’s performance can only be described as "mediocre." What's even more noteworthy is that the semiconductor sector alone has contributed nearly 40% of the gains since March.

The market narrative around AI has re-entered "greed mode," instead of the rational pursuit of reasonable returns. Concerns that were hotly debated just months ago—whether AI computing power costs can be offset by headcount reduction, data center energy supply bottlenecks, profit margins eroded by AI price wars, new competitors disrupting the landscape at lower cost, soaring capital expenditure and stagnant stock buybacks, AI security risks—now seem to have been collectively forgotten by the market.

The Risk of a “DeepSeek Moment” Replaying

Nomura strategist Charlie McElligott has issued the most direct warning.

He said: "Given the current market structure and the high overlap of themes, should another all-out 'DeepSeek-style' shock catalyst happen one day, it could directly trigger a Nasdaq limit-down type of trading."

McElligott further pointed out that in such a scenario, semiconductor ETFs could easily drop 15% in a single day—because 'the assumed reflexive reversal of mechanical inflows would create a large-scale overshooting sell-off.'

In other words, it’s those mechanical funds (like CTA strategies, risk parity funds, etc.) that kept buying during the rise—once a reversal is triggered, they will become amplifiers of accelerated declines.

The two main risks facing this AI bull market—one technical (overcrowded positions), one narrative (can the AI story persist). The former could be triggered anytime, while if the latter breaks, the impact will run much deeper. Overlaid, these risks make up the most structurally fragile part of the current market.

Risk Warning and DisclaimerThe market has risks, investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situations, or needs of any particular user. Users should consider whether any opinions, viewpoints, or conclusions in this article fit their individual circumstances. Any investment made accordingly is at your own risk. ```