The Sword of Damocles Hanging Over the AI Bull Market: It's Not Just South Korea—Leverage in U.S. Stocks Is Equally Alarming

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Global stock markets have repeatedly hit new highs fueled by the AI surge, but the fuel underpinning this rally is becoming increasingly risky—from the US to South Korea, margin balances and leveraged ETF sizes have reached historic extremes. The procyclical nature of leverage is multiplying the tail risks of market volatility.

US margin debt surged 54% year-on-year in May, hitting an all-time high of $1.4 trillion. Meanwhile, the total assets of leveraged ETFs nearly doubled in just under 70 days, surpassing $220 billion around June 3 (FactSet data). The risk of this leveraging frenzy has already manifested in the Korean market: after the Korea Composite Stock Price Index (KOSPI) plunged 10% last week and triggered a circuit breaker, it rebounded sharply, only to trigger another circuit breaker, causing violent fluctuations that led to weakness in US AI-related stocks.

Warning bells are ringing on Wall Street. Barclays analyst Alexander Altmann warned clients this week that since the end of March, leveraged funds have accumulated about $300 billion in derivatives linked to individual stocks and indexes. If this scale needs to be unwound in a short period, "the impact is chilling," and he characterized it as "undoubtedly the largest source of non-discretionary risk currently in the market." Morgan Stanley also issued a warning on June 15, noting that US equity marginal buyers’ dependence on leveraged financing is unprecedented, and this financing is becoming more expensive and scarcer. Charles Schwab, one of America's largest brokers, already tightened margin requirements this month and issued margin call notices to clients who exceeded the new thresholds.

All these point toward the same logic: when leverage-driven rises reach their limit, the consequences of deleveraging will equally magnify the declines.

US Stock Leverage: Both Scale and Intensity Hit Records

US investors’ enthusiasm for borrowing to trade stocks is currently at an unprecedented height.

According to Finra data, US margin debt grew by 54% year-on-year in May, hitting a historic peak of $1.4 trillion. In parallel, the leveraged ETF market experienced explosive growth—these products typically track two or three times the daily fluctuations of the underlying assets. FactSet data shows that from March 30 to June 3, total assets in leveraged ETFs surged from about $115 billion to $220 billion.

The most sought-after products are concentrated in technology and semiconductor stock indices, as well as single-stock leveraged funds for Tesla, Nvidia, and lately SpaceX. The Direxion 3x long semiconductor index ETF gained about 700% from late March to late June—but plunged 31% in a single day on June 5, thereby magnifying the benchmark index’s decline threefold.

From hedge funds to retail investors opening accounts on Robinhood, all types of investors are piling in. Mark Hackett, chief market strategist at Nationwide Investment Management Group, expressed concern:

"I'm worried we are accumulating an implicit leverage that hasn't been fully understood. Some are gambling, borrowing money to buy options on leveraged ETFs—that’s already three to four layers stacked."

Derivative Mechanisms: Procyclical Amplifiers

The danger of leveraged ETFs lies not only in their mechanism of magnifying gains and losses, but also in their potential to distort the price trends of the assets they track—what market professionals call the “tail wagging the dog” effect.

Barclays estimates that, to absorb the inflow of new funds since the end of March, leveraged funds have bought about $300 billion in derivatives contracts linked to individual stocks and indexes. Market makers, in taking these contracts, have to hedge their own exposure by buying the corresponding spot stocks, further fueling the gains in this year’s tech and semiconductor stocks.

The problem is that this mechanism works in reverse when direction changes, and it is self-reinforcing. If the underlying stocks fall, leveraged fund assets shrink, forcing them to reduce positions, which pushes the stock prices lower, triggering more redemptions and selling, forming a negative spiral.

Dave Nadig, research director at ETF.com, issued a warning:

"Any market with known, price-insensitive buyers or sellers is going to have issues. I'm really worried—more and more money is flowing into this leveraged single-stock product system. The more money goes in, the stronger this procyclical trading effect becomes."

South Korea’s Warning: Extreme Concentration Meets High Leverage

The episode unfolding in the Korean market this week is viewed by market professionals as a reference stress test sample.

According to a CICC report, the KOSPI index has surged 87% since the start of the year, leading the world, mainly driven by memory chip giants like Samsung Electronics and SK Hynix. However, highly concentrated holdings combined with extreme leverage have sharply increased market fragility: on Tuesday, due to worries about memory chip expansion plans and domestic discussion of taxing unrealized gains, the KOSPI plunged 10% in a single day and triggered a circuit breaker; after rebounding strongly for two days to reclaim 9000 points, it saw another circuit breaker on Friday.

CICC estimates that leverage multiples in the Korean market currently range from 2x to 5x, with generalized leverage hitting 271 trillion won, a historic high—in theory, a 16% to 36% drop in the underlying assets would trigger margin calls. According to The Wall Street Journal, transactions in leveraged funds tracking Samsung and SK Hynix recently accounted for as much as 50% of the average daily volume in these stocks, causing significant disturbance to share prices in both directions.

Lee Chan-jin, head of Korea’s Financial Supervisory Service, publicly expressed regret at last week’s press conference for not stopping the issuance of single-stock leveraged funds: “These are high-risk products; about 92% of holders are retail investors. Despite consumer warnings, trading enthusiasm shows no signs of cooling."

Financing Costs Soar: Borrowing to Trade Is Getting Expensive

According to a previous Wallstreetcn article, Morgan Stanley’s analysis reveals pressure accumulation from another angle.

The key indicator measuring stock financing costs—the AXW futures (tracking the spread between implied financing rates in S&P 500 total return futures and the benchmark rate SOFR)—for the June one-month contract surged to +140 basis points last week. Even after the S&P 500 retreated from its historic high, the indicator remained elevated, the highest since December 2020 (excluding year-end special periods).

Meanwhile, New York Fed data shows that for the week ending June 3, 2026, US primary dealers’ equity exposures via securities financing like repos reached $223 billion, a record high. Morgan Stanley’s “stock financing dependence” indicator—measured as primary dealers’ stock repo scale divided by the free float market cap of the S&P 500—has surged nearly 50% over the past year, approaching the March peak. This means the amount of borrowed capital behind every dollar of market value is becoming increasingly concentrated.

This financing demand is highly concentrated in a few sectors. Morgan Stanley data shows that in the past three months, only the information technology sector outperformed the S&P 500’s 11 GICS sectors, rising 24.2% and with excess returns of 13.3%. Over the past year, in about 70% of trading days, the number of sectors outperforming the broad index did not exceed five. This means the market’s overall rise has actually been supported by leveraged money in a very small number of sectors, and once these funds begin to withdraw, the broader market’s impact will be amplified simultaneously.

Once Deleveraging Starts, The Impact Will Be Multiplied

Morgan Stanley warns that the current situation poses potential nonlinear risk: High financing costs force leveraged buyers to stop adding positions, the disappearance of marginal buyers robs the market of upward momentum, and the ensuing price correction triggers deleveraging, selling pressure is further amplified by leverage, ultimately leading to a larger-than-expected decline. Historical data shows that peaks in AXW futures closely coincide with peaks in the S&P 500.

More concerning, Morgan Stanley’s Financial Conditions Index shows that from the outbreak of the Iran conflict to June 11, financial conditions have tightened by the equivalent of a 31 basis point rate hike, mainly driven by rising 10-year Treasury yields and a stronger dollar. However, because the index itself is still rising, most investors are unaware of this tightening — stock rallies contribute about -21 basis points of easing effect, masking the pressure from other factors to some extent.

Morgan Stanley forecasts the Fed will cut rates by 25 basis points each in March and June 2027, with the final policy rate target at 3.00%–3.25%. However, the bank warns, once deleveraging triggers a market decline, investors will be forced to reassess financial conditions and reprice the Fed’s policy path, causing previous weighting of tail risk for rate hikes to collapse first.

Alexander Altmann wrote to clients: “The technical forces magnifying upside momentum via leverage expansion may start to cut in the opposite direction.”

Risk Warning and DisclaimerThe market carries risk, and investments require caution. This article does not constitute personal investment advice and does not take into account individual users’ specific investment goals, financial circumstances, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are appropriate for their particular situation. Investing based on this article is at your own risk. ```