TradingKey - Despite strong economic data and hopes for rate cuts, the sheer strength of the U.S. stock market rally remains puzzling — especially amid lingering tariff risks. Analysts warn that a powerful short squeeze is fueling speculative froth, and the risk of a market correction is rising.

On Thursday, July 24, both the Nasdaq Composite and the S&P 500 hit new all-time highs — the 15th record close for the S&P 500 in 2025. On Friday, July 25, the index rose another 0.46%, on track to set its 16th record high of the year.

The Short Squeeze Is Heating Up

The Barron’s noted that the market’s stubborn rally has lasted longer than many expected, driven in part by a short squeeze — where traders who bet against stocks are forced to buy them back as prices rise, further accelerating the rally.

Bespoke Investment Group analyzed the 30 most heavily shorted stocks in the Russell 3000 Index, including Kohl’s, Hertz Global, and Hims & Hers, and found that this basket has surged 89% since April 8. Over the same period, UBS’s basket of 100 most-shorted stocks rose 79%.

Meme Stock Mania Returns

Wall Street’s appetite for speculative stocks has reignited. Shares of Opendoor, Kohl’s, and Healthcare Triangle have soared in recent weeks.

Analysts are growing concerned that this irrational momentum could undermine the broader market’s long-term health.

Bronte Capital warned,  “Garbage stocks have risen aggressively. This is an environment like early 2021, when the consensus rapidly became that you should buy frauds because they will squeeze higher. People seriously talked about fraud as an asset class.”

Speculative Fever Rising

On Thursday, Goldman Sachs reported that its Speculative Trading Index (STI) has surged over the past few months, reflecting increased trading volume in unprofitable stocks, penny stocks and stocks with elevated enterprise value to sales multiples.

While the current STI level remains below the peaks seen in January 2000 and February 2021, the rapid rise signals a sharp increase in risk appetite.

Goldman noted that bursts of speculative activity often coincide with violent short squeezes. While this can fuel further upside in the near term, it also increases downside vulnerability.

Warning Signs of a Late-Stage Bull Market

Evercore ISI pointed out that since the 1990s, the final stages of every structural bull market have featured:

• A surge in speculative capital
• Widespread FOMO (fear of missing out) among investors
• Diminished risk awareness

Today, investors appear to be underestimating near-term risks, from trade tensions to stretched valuations.

The firm now expects the S&P 500 to pull back by 7% to 15% in the coming months — a correction that could reset the market for more sustainable growth.

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