U.S. Stock Short-Squeeze Slowing Down? Investors Rush Into High-Beta Stocks While UBS & Goldman Issue Sell Calls

TradingKey - With the tariff negotiation deadline approaching, and amid worsening GDP and consumer data, U.S. stocks are surprisingly nearing record highs — making this short-squeeze rally seem somewhat “strange.” Wall Street analysts are urgently warning investors to consider trimming positions.

This week, strength in tech stocks pushed the Nasdaq 100 Index to new all-time highs. NVIDIA shares hit a fresh record after CEO Jensen Huang championed robotics technology, while the S&P 500 edged closer to its historical peak.

U.S. Market in a Short-Squeeze Rally

Analysts point out that recent market action has taken on characteristics of a classic short-squeeze rally, with investors clearly in risk-on mode. UBS noted that markets have experienced a sharp short-covering rebound, with the UBXXSHRT Short Squeeze Index surging over 40%.

Goldman Sachs observed that lower-quality stocks have led the recent rally — driven not by strong fundamentals, but rather by short-covering activity among forced sellers.

Data shows that compared to the Invesco S&P 500 Low Volatility ETF, the Invesco S&P 500 High Beta ETF is on track for its best quarterly performance since 2020. Additionally, Goldman’s indicator tracking stocks with weaker balance sheets is set to deliver the best monthly performance relative to the S&P 500 since January.

Wall Street analysts attribute this surge largely to FOMO-driven behavior. Murphy & Sylvest Wealth Management pointed out that using the pandemic as a reference, investors have repeatedly used dips as buying opportunities — especially for high-beta stocks.

Evercore ISI said the current phase marks the beginning of a typical FOMO cycle, which often appears in the later stages of structural bull markets. Surprisingly, given the record levels of pessimism just over two months ago and ongoing uncertainty around economic and policy outlooks, speculative behavior has returned at an unusually rapid pace.

Time to Be Cautious

While the overall market tone remains positive, risks persist as the trade negotiation deadline looms. The impact of tariffs on inflation, corporate profits, and global growth remains uncertain.

Louis Miller, Managing Director at Goldman Sachs, believes there are still short-selling opportunities in fundamentally weak stocks. Starting from July, weakening growth prospects, rising inflation, and a potential slowdown in the fall could hit lower-quality, growth-sensitive sectors hardest.

UBS warned that although the sharp rise in the short-squeeze index suggests underlying strength, its proprietary measure of self-directed risk appetite continues to decline.

Historical data also raises caution: during similar short-squeeze rallies and risk-on environments, the S&P 500 has averaged an 11% drop over the following three months, while the Nasdaq has fallen 13%.