3 Heavily Shorted Stocks That Could Pop on Rate Cuts

Key Points

• Interest rate cuts could fuel short squeezes in heavily shorted stocks as lower rates improve valuations and demand across sectors.
• Etsy, SoundHound, and NuScale are heavily shorted stocks with strong thematic or fundamental tailwinds, making them compelling watchlist candidates.
• High short interest creates the potential for sharp upside surprises, especially if macro catalysts like further rate cuts shift market sentiment in their favor.

When a stock has high short interest, investors assume the bears must know something they don’t and proceed with caution. But high short interest alone doesn’t always reflect a problem. In fact, some of the most intriguing opportunities can come from stocks that are heavily bet against—especially when there’s a macro catalyst that could flip the script.

And today, that catalyst could be interest rate cuts. Why? Lower rates can ease funding, support valuations, and jumpstart demand across sectors. The Federal Reserve (the Fed) has already delivered its first rate cut, and more are possible by the end of the year.

For heavily shorted names like Etsy Inc. NASDAQ: ETSY, SoundHound AI Inc. NASDAQ: SOUN, and NuScale Power Corp. NYSE: SMR, this set up could drive share prices higher—forcing bearish traders to buy back stock to cover their positions. That added buying pressure could result in a short covering rally, or even a full-on short squeeze.

These three businesses also have solid fundamentals and macro tailwinds that could drive long-term returns. But with short interest running high, any upside surprise could be amplified, turning a steady rally into something bigger.

Etsy: Consumer Weakness May Be Nearing a Bottom

Weak confidence and sentiment data confirm what markets have been signaling in recent months: consumers have been cutting back on discretionary spending. However, current readings are near cyclical lows, suggesting there’s limited room for further downside.

But with rate cuts starting to flow through the economy, that pressure may begin to ease—and Etsy could be one of the early beneficiaries.

The platform’s low-overhead, asset-light model puts it in a good place to benefit from a spending rebound. On top of that, Etsy is beginning to expand into overseas markets, capturing market share and helpign offset domestic weakness.

While not it's not largest company, there is nothing wrong with Etsy’s size or its balance sheet. Functioning as an e-commerce middleman equates to a much less capital-intensive business. This allows for higher leverage and cash flow conversion when things start to heat up on the consumer end.

With the the Fed now set to continue cutting interest rates by another 0.25% in October 2025, as indicated by the 94.6% probability reported by the FedWatch Tool, chances are that this consumer spark is just around the corner—and Etsy stands at the eye of this future storm.

Now that 20% of Etsy’s float is held in short positions, and momentum has sent the stock to 92% of its 52-week high, there is a real risk that these short sellers will be forced to close their positions sooner rather than later.

SoundHound: Rate Relief Could Support AI Growth Plays

While most of the market is focused on the data side of this artificial intelligence (AI) race, it could be overlooking other areas that deserve just as much attention. One of which is the role AI plays in vocal recognition and command prompts—where SoundHound dominates today.

With partnerships across automotive, industrial, and retail sectors, SoundHound isn't your typical AI stock. Its rapid expansion into business-to-business (B2B) partnerships underscores the strong adoption of its voice AI technology across the economy. Diversifying revenue in a subscription-based model is never a factor investors want to ignore when considering future value creation.

Like many early-stage tech names, SoundHound is sensitive to the cost of capital. Lower rates could make future financing more manageable while supporting valuation multiples for growth stocks more broadly. That could be why Geode Capital Management took an additional 8.3% stake in SoundHound, bringing its net position to $94.8 million.

But, at 32.5%, short interest remains high If the macro narrative continues to shift in favor of tech and AI, SOUN could benefit—and short sellers might get caught on the wrong side of the bet.

NuScale: Infrastructure Premium May Look Better as Rates Fall

NuScale Power builds small modular nuclear reactors, a next-generation clean energy solution gaining traction as electricity demand spikes across the United States. Data center expansion and rising urban consumption are pushing the grid to its limits, and nuclear remains one of the few scalable, zero-emission options on the table.

The stock trades at a 315.7x price-to-sales (P/S) multiple today, a steep premium compared to the electric power industry’s 53.3x average. That lofty multiple—and the early-stage nature of the business—has made it a magnet for short sellers, who now hold 32.5% of the float.

But here’s where rate cuts come in. Long-duration, capital-intensive infrastructure projects like NuScale’s look a lot more viable when it becomes cheaper to borrow. Lower interest rates could also help redirect investor capital back into clean energy themes, especially those aligned with national energy resilience.

That could be the theme behind Barclays’ recent move to issue a $45 price target on SMR stock, well above the $36.67 consensus estimate. This12.5% implies may provide enough potential to put pressure on these short sellers. If nuclear starts gaining broader momentum, they may find themselves fighting the wrong narrative.