Beware of bull trampling! The high-level operation of US stocks hides "hidden dangers": the scale and cost of leveraged bets skyrocket, and the earnings season poses the ultimate test for the "bull market".

In the context of the US stock market hovering near all-time highs and with technology and AI concept stocks continuing to attract fervent demand, the US stock financing market is facing increasingly intense pressure. According to data from Morgan Stanley, on June 26, the financing cost of stock positions climbed to a level about 200 basis points higher than the federal funds rate, reaching the highest level since December 2024. Although quarterly settlement indicators have dropped to 89 basis points, market participants warn that the structural factors driving up interest rates are not dissipating, but rather accumulating. "The risk of surging financing may accompany us in the foreseeable future," said Martin Tobias, a US interest rate strategist at Morgan Stanley. This leverage-driven financing pressure is becoming the most easily ignored "landmine" in the high-flying US stock market. "Unusually steep rise in financing costs": Leverage demand far exceeds normal levels The repo market is at the center of this storm. In this market, investors and traders borrow short-term cash against stocks held as collateral. Normally, with high liquidity collateral as security, stock financing rates are only a few basis points higher than the federal funds rate or secured overnight financing rate (SOFR). But the situation at the end of June was drastically different. Morgan Stanley data shows that stock financing costs sharply rose before the end of the quarter. The root of this anomaly lies in a severe mismatch of supply and demand. Barclays US interest rate strategist Sam Earl attributed the recent pressure to a simple supply and demand problem - the demand for equity financing has surged, but broker-dealers' balance sheet capacity has not kept pace. He estimates the size of the equity financing market to be around $10 trillion, and a 10% increase in leveraged equity exposure could an additional financing demand of about $1 trillion. Coupled with strong growth in overseas markets (especially in Asian markets), these demands are quickly depleting existing financing capacity. At the same time, primary dealer equity financing exposure is hovering near all-time highs. Even after the end-of-quarter effects subside, financing costs remain elevated - a dynamic that coincides with elevated primary dealer equity financing exposure and lending activities highly concentrated in a few stock groups such as technology and semiconductor companies. As of June 24, Federal Reserve data shows dealers' balance sheets holding about $211 billion of such exposure. Further calculations by Morgan Stanley interest rate strategist Martin Tobias show that dealers' equity repo exposure as a proportion of the S&P 500's free float market capitalization has risen by 50% over the past year - indicating that each dollar of investable stock capital increasingly relies on leverage support. Structural expansion of leverage: From margin debt to leveraged ETFs Behind the skyrocketing financing costs is a systemic expansion of leverage levels in the US stock market. Margin debt has reached a historic high. According to data from the Financial Industry Regulatory Authority (FINRA), margin debt in the US reached a record $14.2 trillion in May 2026, an 8.5% increase month-over-month and a 53.7% increase year-over-year. Meanwhile, US investors' net credit balance has dropped to a historic low of negative $991.7 billion, measuring the difference between cash and borrowed funds in investors' margin accounts. This trend is driven by the explosive growth in the size of US leverage ETFs. Bloomberg data shows that total assets under management for US leverage and inverse leverage equity ETFs are approaching $200 billion. Among these, as much as 85% of leverage ETF assets are concentrated in three major sectors: technology, artificial intelligence, and semiconductors. The assets under management for the triple-long semiconductor ETF (SOXL) have reached a historic high of $34 billion, more than triple since April. The assets under management for the triple-long Nasdaq 100 Index ETF (TQQQ) have also risen to around $40 billion, nearing historical highs. The pro-cyclical trading mechanism of leverage ETFs is amplifying market volatility. Macro strategist Simon White points out that leverage ETFs inherently have a "short gamma" property - they are forced to buy more on the way up and sell on the way down. Rebalancing demand on certain trading days can exceed $50 billion, reaching historic highs. Toronto-based independent trader Kevin Muir likens the current environment to an "extremely crowded trade" - optimism is deeply entrenched. "Due to the current frenzy of speculative activity, the next correction could be much larger than expected," Muir warns. Explosive growth of leverage ETFs. In just over two months from March 30 to June 3, the assets under management for leverage ETFs nearly doubled to a record $220 billion. Among them, the size of leverage semiconductor ETFs increased by 136%, and semiconductor-related leverage ETFs by nearly 175%. These funds magnify exposures through total return swaps (TRS), while banks also hold cash stocks and refinance them through the repo market, creating a chain of leveraged layering. Behind every dollar of stock, there is more leverage. Tobias measures the proportion of dealer equity repo exposure relative to the free float market capitalization of the S&P 500 index has increased by 50% over the past year, indicating that each dollar of investable stock capital is increasingly relying on leverage support. Dealer balance sheets stretched thin: Imbalance of supply and demand in a $10 trillion market The pressure in the financing market is not an isolated short-term phenomenon, but it exposes deeper structural vulnerabilities in the US financial system. The pace of expansion of dealer balance sheets lags far behind the growth in leverage demand. Even with high liquidity collateral as security, financing costs remain high, indicating that market makers' capacity is reaching its limits. Unless dealer balance sheets expand significantly, or stock prices cool enough to reduce financing demand, similar pressure may reoccur. This imbalance of supply and demand means that similar pressure may reoccur unless dealer balance sheets expand significantly, or stock prices cool enough to reduce financing demand. The Federal Reserve's semi-annual "Financial Stability Report" released in May has explicitly warned of closely monitoring risk factors such as asset valuations and financial leverage. The report notes that US stock prices are at historical highs, with stock risk premiums near lows, implying that investors are taking on high risks but may not necessarily receive corresponding returns. Hedge fund leverage remains high and concentrated in the largest funds. A more extensive shadow banking system is also accumulating risk. US bank exposure to hedge funds and non-bank financial institutions has expanded from about $2 trillion to about $4.5 trillion, and the average total leverage ratio of US hedge funds has nearly doubled since 2022. Goldman Sachs futures trading expert Robert Quinn pointed out in early July that stock financing costs are experiencing an "unprecedented" surge, and dealer leverage has reached mid-year historical peaks. It is worth noting that not all market participants are aggressively leveraging. According to data from Goldman Sachs Prime Brokerage, the total leverage ratio of US long/short hedge funds is currently in the 2nd percentile of the past year, and the net leverage ratio is in the 6th percentile - hedge funds have rarely been as conservative as they are now over the past 12 months. This suggests that the main drivers of the current leverage expansion are not professional hedge funds, but rather retail investors, leverage ETFs, and other non-bank institutions. Systemic risk: When rising financing costs trigger chain reactions Higher financing costs are changing the underlying logic of market dynamics. With a higher "holding cost" threshold, leveraged holders need stock prices to rise more to cover financing bills. When banks reduce lending at the end of the quarter or reporting period, they can do so by raising fees or requiring more collateral to allocate financing. This could in turn lead to faster selling of the most leveraged market sectors during price fluctuations, concentrating declines on the stocks initially attracting leverage. Narrowing market leadership and concentrated leverage. The leading sectors of the stock market are shrinking, with leverage increasingly concentrated in popular technology sectors, making the market more fragile when sentiment shifts. The potential "amplifying" effect. Macro strategist Simon White warns that record levels of leverage have extended from retail ETFs and hedge funds to banks and money markets, deeply penetrating the entire system through bank balance sheets. Bank exposure to hedge funds has doubled in four years to about $4.5 trillion, turning banks from a "dampener" of market volatility into an "amplifier". Earl expects that unless dealer balance sheets expand significantly, or stock prices cool enough to reduce financing demand, similar pressure may reoccur. Muir's warning is more direct: "If left unchecked, it will create a very dangerous environment. The likelihood of accidents is increasing." Outlook: High leverage meets earnings verification period, the "stress test" of earnings season As mid-July approaches, the US stock market is facing a key macro inflection point - the second quarter earnings season. In the context of high financing costs and crowded leverage positions, the ability of corporate earnings to support current valuations will be the core variable in testing market resilience. FactSet data shows that analysts have raised second-quarter earnings expectations for the S&P 500 by 3.4%, with second-quarter earnings expected to grow by 23.3% year-over-year. 111 S&P 500 component companies have already provided second-quarter earnings guidance, with 57% giving positive guidance. However, the high-beta nature of leverage ETFs means that any earnings reports below expectations could trigger chain reactions - the mechanical rebalancing of leverage ETFs could amplify downward movements. Goldman Sachs strategists have already pointed out that higher US bond yields, slowing growth, and doubts about the sustainability of AI earnings will limit further valuation expansion. Savita Subramanian, a strategist at Bank of America, believes that the S&P 500 index faces downside risks in the second half of the year, primarily driven by high growth expectations and uncertainties around the returns from AI infrastructure capital spending. A double test of financing costs and earnings. Changes in financing costs, adjustments in leveraged positions, and marginal shifts in regulatory attitudes could all amplify market volatility. The market breadth is extremely narrow currently - semiconductor and computer hardware companies have contributed about 87% of the first-half gains in the S&P 500 index. This means that once AI industry performance falls short of expectations, the highly concentrated leverage positions could trigger mass liquidation. End-of-quarter effects may resurface: as the upcoming quarter-end approaches, banks tend to reduce lending to meet financial reporting requirements, leading to significant increases in repo rates and rising short-term cash costs that may trigger a general retreat in popular trades. Goldman's "tactical opportunity" assessment: Goldman Sachs quant strategy analysts have noted that the size of semiconductor leverage ETFs has dropped sharply by about $53 billion, and hedge fund leverage ratios have fallen to near one-year lows, indicating systemic pressures are being absorbed. As leverage recedes and positions stabilize, the bank believes it is a tactical opportunity to try to establish long positions in semiconductor and momentum stocks. However, as Muir warned, in a market driven by leverage, the deeper the optimism is entrenched, the stronger the eventual impact of the correction. As financing costs remain high, dealer balance sheets are stretched thin, and leverage is concentrated in a few hot sectors, the US stock market may be brewing a much more severe volatility than it appears on the surface. When the cost of borrowing to buy stocks spikes by 200 basis points, the assets under management for leverage ETFs approach $200 billion, and margin debt hits a historic high of $14.2 trillion, the rise in US stocks is no longer just a fundamental story. It is increasingly resembling a "leverage bull" market driven by leverage - with every dollar's rise backed by increasingly more borrowed money. And the curse of leverage lies in: it amplifies gains on the way up, but also magnifies pain on the way down. As the curtain rises on the earnings season, this feast built on leverage is about to face a true stress test.