Investors have placed record short bets against the US stock market

Short sellers have placed record bets against the US stock market, according to a new analysis from S3 Partners.

The financial data firm says its measure of short interest in US stocks has hit record levels. While shorting is a natural hedging strategy among bullish investors, increased bets on a decline in US stocks aligns with concerns about high valuations and cracks in the AI narrative as investors questions the economics of colossal capex.

Short interest in all S&P 500 stocks is about 3.7% of the index’s free float, according to data S3 aggregated from hedge funds, asset managers, and financial firms. That reflects the highest volume of short interest the index has seen since S3 began tracking the data in 2010.

Prior to 2010, short interest in the median S&P 500 stock peaked at around 3.8% of the index’s market cap in 2008, during the Great Financial Crisis, according to an analysis from Goldman Sachs.

The surge in short interest this year comes at an important juncture in the nearly four-year-old bull market, with the major indexes still hovering near record highs even as doubts about the AI bull case percolate in the market.

Memory and semiconductor stocks, two of the market’s hottest trades this year amid the AI frenzy, stumbled into a bear market this month. At the same time, investors have also been cautious on the AI hyperscalers as they spend hundreds of billions on the technology without a clear path to monetization.

Broader macro concerns are also casting a shadow over the rest of the market. Tensions remain high between the US and Iran, and questions linger about the path of inflation this year. A reprieve in June CPI data could prove temporary if the war reignites, which could push the Federal Reserve to raise interest rates this year.

Institutional investors grew more bullish overall in the last month, but are growing increasingly wary of the semiconductor trade. 82% of surveyed fund managers in July said they believe global chip stocks are the most crowded trade in financial markets, according to Bank of America.

Almost half of fund managers surveyed also said they believe the AI bubble is the market’s biggest tail risk, up from 28% of investors who thought so the prior month.

Yet, investors also increased their allocation to stocks, with positioning in US equities rising to its highest level since December 2024, the bank wrote in a recent note.