The market’s tariff-driven rally has gone as far as it’s likely to go. Now it’s time to think about taking profits—or even going short stocks that have come too far, too fast.
It’s been a heck of a run. The S&P 500 has gained 25% since bottoming on April 8, when President Donald Trump began to dial back the most onerous tariffs proposed on so-called Liberation Day. With trade levies no longer threatening to shut down the U.S. economy, the markets could focus on other things like tax cuts, deregulation, and solid earnings growth.
Now the tariff troubles may be making a comeback. Trump has proposed new penalties, to take effect on Aug. 1, and while the market is hoping the TACO trade is still a thing, the Bloomberg Trade Policy Certainty Index has surged to a reading of 5.8, the highest since April 29. (It climbed above 9 on Liberation Day in April). It’s the kind of backdrop that almost demands investors start taking profits—and even shorting, or betting against, individual securities.
Shorting isn’t for the faint of heart. An individual stock can only go to zero, which limits losses. A stock can, in theory, go up an infinite amount, and the short seller can lose far more than they might gain. There’s also a cost to borrow stock, which raises the bar to make a profit. But while a stock can get too expensive to buy, it almost never gets too cheap to sell. Anyone who has made money on the short side knows the thrill of getting it right.
Wall Street strategists provide various lists of stocks worth shorting. Wolfe Research’s Chris Senyek screens for stocks that have a below-average frequency of meeting earnings estimates, and those with particularly volatile profit margins, among others. Evercore ISI’s Julian Emanuel lists 29 companies with high valuations, overly confident sentiment scores, and a history of missing earnings and sales estimates that he warns not to buy ahead of their releases.
Nineteen stocks made both lists, including Las Vegas Sands, Texas Pacific Land, DraftKings, Albemarle, and MicroStrategy, which Barron’s panned in December.
J.P. Morgan strategists also highlighted their “most compelling structural and tactical short ideas,” which included two stocks that appeared on the other lists: Tesla and Choice Hotels International—and earnings season could provide the catalyst for the stocks to take a dive.
Earnings estimates for Tesla, which is set to report second-quarter results on July 23, have dropped 53% this year, driven by declining projections for vehicle deliveries amid weakening electric-vehicle demand. That could provide a low bar for the company, though that’s not a sure thing given the fact that Tesla has missed forecasts in six of the past eight quarters. It also trades at 132 times 12-month earnings estimates, well above its five-year average of 91 times.
Choice Hotels, though more obscure than Tesla, is another stock to watch out for. J.P. Morgan analyst Daniel Politzer, who initiated Choice with a Sell rating on June 23, expects the hotel chain to grow earnings before interest, taxes, depreciation, and amortization, or Ebitda, at a low-single-digit annual clip through 2027, well behind Wyndham Hotels & Resorts’ 7% annual growth.
The stocks, however, trade at similar multiples—18 times 12-month forward earnings for Choice Hotels and 17.5 times for Wyndham. Choice also has a spotty history with producing better-than-expected results on quarterly reports—it’s missed estimates three times over the past eight quarters. It has beaten on both top and bottom lines only twice in that stretch.
It may just be time to walk away.