Rising Leverage in U.S. Stocks Poses Systemic Risks

Author: Bob Elliott

Compiled by Deep潮 TechFlow

DeepInsight Summary: After the financial crisis, regulators successfully tamed banks but allowed leverage to seep into the retail market in more隐蔽 forms—leveraged ETFs, options platforms, and brokerage wealth management loans—all pointing to the same target: U.S. stocks. These fragmented forms of leverage are difficult to quantify, yet each has reached historic highs; should a reversal occur, the amplification effect will far exceed that of traditional credit crises.

Yesterday, a seasoned journalist asked me how I view the leverage risks in today’s financial system compared to the days when I predicted massive losses in the banking system before the financial crisis. In the context of today’s stock market frenzy, this question is especially pertinent.

After nearly two decades of effort, regulators have largely eliminated the problem of concentrated credit risk exposure among highly leveraged financial institutions. This represents a significant success in enhancing financial stability compared to the pre-crisis era. Today, the risk of systemic important banks failing—or even large regional banks failing—is virtually zero.

But replacing those old-fashioned centralized leverage mechanisms are more subtle and widely distributed forms. Today’s financial system features leverage that is more retail-oriented and focused on stock leverage rather than traditional lending tied to the real economy.

Today, leverage to amplify returns is everywhere offered to investors—leveraged ETFs, retail options trading platforms, securities lending by bank wealth management platforms, and more. If you’re an investor seeking leveraged returns, there are countless options available, far surpassing the old-fashioned margin loans that were once accessible only to a select few qualified investors. And all of this is focused on one thing: amplifying stock returns.

As the stock market has shifted from strong to frenzied, most investors have used up all their available cash to go long; the only remaining way to increase exposure is through explicit and implicit leverage structures. Current prices reflect a sharp increase in leverage within the financial system over the past few months. The challenge is that higher prices may require more leverage than currently exists.

Having personally witnessed several leveraged liquidations and studied many more cases, it’s always difficult to know exactly when a reversal will occur—but it will inevitably happen at some point. Just as leverage has been so effective in pushing asset prices higher, once a reversal comes, it will amplify the downward momentum.

But unlike before the financial crisis, when only 10 to 20 financial institutions needed to be tracked, the widespread use of leverage today makes it harder to see how far it has gone and how far it still needs to go to fully unwind.

It’s currently difficult to fully understand all the various forms of leverage supporting stock buying. However, several more well-known areas are indeed key drivers. The issue is that individually, each one may seem small, but when summed together, they represent widespread and widespread use of leverage by investors.

One of the most well-known is the leveraged ETF, which has seen particularly strong growth in the semiconductor sector amid recent market enthusiasm. It’s important to remember that the notional exposure of these products is 2 to 3 times these figures, as this reflects only the assets under management of the products themselves.

Chart: Leveraged ETF assets under management increased from $47 billion in June 2020 to $218 billion in June 2026 (a 4.6x increase); by sector, semiconductors account for 30%, technology for 37%, and others for 33%. Source: Bob Elliott

However, retail investors are finding many other ways to gain leverage. Securities lending by bank wealth management divisions is notably recognized as a key source of profit.

Chart: Securities lending volume by bank wealth management divisions (considered a key profit source). Source: Bob Elliott

As traditional real-economy lending has largely disappeared in recent years, banks have significantly increased this type of lending, injecting hundreds of billions of dollars into asset markets.

Chart: The scale of lending injected by banks into asset markets (surged in recent years to hundreds of billions of dollars). Source: Bob Elliott

The increased use of options has also provided implicit leverage positions in the U.S. market. As Bloomberg recently highlighted, this is one of the key drivers behind the recent divergence in the U.S. market.

Chart: Implicit leverage positions provided by options on U.S. stocks. Source: Bob Elliott

All of these financial engineering activities are built on top of traditional margin loans from brokerages, which are at historic highs and have injected hundreds of billions of dollars into the stock market over the past year.

Chart: Traditional margin loan sizes by broker-dealers (at historical highs, injecting hundreds of billions of dollars into the stock market over the past year). Source: Bob Elliott

Chart: Margin debt-related metrics (synchronized with broker margin loans at extremes). Source: Bob Elliott

Moreover, it's not just retail investors—hedge funds are also increasing leverage on their net equity exposure to keep pace. Hedge fund beta exposure to equities has surged, along with prime brokerage activity at banks, efforts not captured in the earlier consumer-focused figures.

Chart: Hedge Fund Net Equity Exposure Leverage and Prime Brokerage Scale (Simultaneous Surge). Source: Bob Elliott

The shift of leverage from centralized financial institutions to a more widespread, retail-oriented distribution has made it far more difficult to add up digital figures directly. As macro analysts, we feel like we’re constantly tracking pockets of leverage here and there… well, everywhere. Everywhere we look, leverage is at extreme levels relative to history.

Current asset prices reflect the leverage built up through all these channels. While it’s difficult to know the exact limit, there’s an increasing sense that this is a house of cards, vulnerable to even the slightest breeze.