Despite Big Tech Rally... S&P 500 Short Selling Hits 16-Year High (Update)

Bespoke Investment Group Analysis
"Without the 7 Big Tech, S&P 500 Negative"

Despite the stock rally of US big tech companies this year, the number of investors betting on the decline of the Standard & Poor's (S&P) 500 index has increased. US hedge fund investors are anticipating a future drop in big tech stock prices.

On the 4th (local time), the Wall Street Journal (WSJ) reported, citing investment information firm Bespoke Investment Group, that the proportion of short positions on the S&P 500 by investors including hedge funds is at its highest level since 2007. This surge in short selling occurred amid the ongoing rally of big tech stocks. The S&P 500, composed of 500 large companies, has risen 12% so far this year.

WSJ analyzed that if the seven major big tech companies had not experienced stock price increases, the S&P 500 would have recorded negative returns. Looking at the top five companies by market capitalization, Apple’s stock price has jumped 39.3% this year. Microsoft (MS) rose 39.9%, while Amazon, Nvidia, and Alphabet, the parent company of Google, surged 48.0%, 169.1%, and 41.3%, respectively. These gains significantly outpaced the S&P 500 index’s 11.5% increase during the same period.

On the other hand, excluding the top big tech companies by market cap, most stocks have remained sluggish. According to Bespoke’s analysis, the top 10 companies in the S&P 500 saw their stock prices rise 8.9% last month, whereas the remaining 490 companies’ stock prices fell by 4.3%. Despite the poor performance of the majority of companies, the S&P 500 index rose 0.2% last month, buoyed by the gains of the top 10 companies.

According to market research firm S3 Partners, the amount bet on the decline of the S&P 500 has increased to $487 billion (638 trillion KRW). This is approaching the all-time high of $558 billion (730 trillion KRW) recorded in November 2021. Notably, short selling of big tech companies, whose stock prices have surged significantly this year, has increased markedly. As of last month, short positions against Tesla amounted to $3.57 billion (4.7 trillion KRW), while short selling against semiconductor company Nvidia and Meta, the parent company of Facebook, increased by $2.5 billion (3.3 trillion KRW) and $7.26 billion (9.5 trillion KRW), respectively.

WSJ analyzed, "After a sharp decline last year, tech stocks have returned to a familiar high level," adding that "the surge in interest in generative artificial intelligence (AI) technology has partly influenced this." In fact, Nvidia, which holds 90% of the AI semiconductor market, has seen its stock price triple this year thanks to the ChatGPT craze. Last week, it even joined the 'trillion-dollar market cap club' ($1 trillion, 1,310 trillion KRW).

However, since big tech stocks including Nvidia surged significantly last month, short sellers are currently exposed to considerable losses. Jake Gordon, an analyst at Bespoke Investment Group, commented, "Regardless of how stock prices move, people are definitely showing signs of caution."

There are concerns that investment conditions will remain unfavorable for the time being due to persistently high inflation and expectations of liquidity tightening in the bond market following US debt ceiling negotiations. Aliki Lupiak, portfolio manager at asset management firm Robeco, analyzed, "The current stock market is not moving based on corporate fundamentals," adding, "It is really difficult and challenging to navigate the market right now."