U.S. stocks still have "deleveraging room"! JPMorgan: It will take three months to return to pre-April levels

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The shadow of US stock market deleveraging has not yet dissipated.

According to Wind Trading Desk, JPMorgan’s global market strategy team pointed out in their latest report released on July 15 that the investor deleveraging process in the US, which began in June, is still ongoing. There is further room for deleveraging in leveraged equity ETFs, options markets, and margin accounts, which will continue to suppress stock market performance for the coming months.

They estimate that it will take about three more months of volatile trading for the ratio of leveraged equity ETF scale relative to underlying market capitalization to return to pre-April levels.

Leveraged ETFs: Self-correcting mechanisms kick in, but the road is long

The problem with leveraged equity ETFs is essentially a mathematical trap.

The bank explained the logic: Suppose the underlying index drops 10% one day, then rebounds 11.1% the next day to its original level. A 3x leveraged ETF would lose 30% the first day, gain 33.3% the second day, ending with a net loss of 7%. In other words, volatile markets themselves erode the scale of leveraged ETFs, which is an inherent "self-correcting" mechanism.

Data has already confirmed this. Analyst data shows leveraged semiconductor stock ETFs have shrunk 34% in scale since the peak, and all leveraged equity ETFs have shrunk by 13%.

But the problem is, the decline in the ratio relative to the underlying stock market capitalization is much smaller.

JPMorgan analysts pointed out, the ratio of semiconductor leveraged ETF scale to underlying market capitalization is three times the average of all equity ETFs, explaining why semiconductor stock volatility is far higher than the broader market. More alarmingly, even overall leveraged equity index ETFs themselves are at a historically high ratio, indicating this is not just an issue with certain sectors, but a systemic market risk.

Analysts judge: "It will take about three months of volatile trading before the ratio of leveraged equity ETF scale to underlying market capitalization returns to pre-April levels."

Moreover, new capital continues to flow into leveraged ETFs in July, further extending the time needed for deleveraging.

Options and Margin Accounts: Two “risk zones” for retail investors

In the options market, JPMorgan analysts tracked retail call option buying indicators (based on OCC data, counting customers holding fewer than 10 contracts), which peaked at nearly 14 million contracts on June 5, matching the historical tops of October 2025 and November 2021.

History shows every time this indicator tops out, tech stocks experience several months of adjustment, with bottoms often coinciding with the indicator falling to 2-4 million contracts. The indicator has already dropped noticeably from its peak, but analysts believe if it ultimately hits the 2-4 million "capitulation" level, tech stocks will remain under sustained pressure.

Margin accounts present an even more severe situation. Analysts use the NYSE Net Debit Balance as a proxy for US individual investor leverage. The data shows current levels are at historically extreme highs, similar to peaks seen at the end of 2021 and mid-2018—and after both peaks, the stock market underwent several months of adjustment.

Analysts note margin accounts have shown signs of some pullback recently, but "a significant deleveraging is still required before no longer posing notable resistance to the stock market."

By contrast, leverage in risk parity funds has basically returned to normal, and is no longer a primary source of market resistance.

Hedge Funds: Semiconductor exposure may have quietly shrunk

On the hedge fund front, the bank’s data shows an intriguing shift.

In June, despite declines in the S&P 500 and Nasdaq indexes, equity long-short hedge funds and equity sector TMT hedge funds posted positive returns of 1.2% and 3.7% respectively. Analysts believe this is closely related to the strength in the semiconductor sector—June’s SMH semiconductor ETF was up 9.5%, while US hyper-scale cloud computing stocks fell 14.5% over the same period.

But moving into July, signals changed. The daily correlation between equity long-short funds and semiconductor stocks has significantly decreased, and analysts’ high-frequency leverage proxy indicators show leverage levels have declined in July—after peaking in June at the highest since 2017.

Based on this, JPMorgan judges equity long-short hedge funds may have trimmed semiconductor exposure in July.

Second Half Supply and Demand: Retail capital is the biggest support

Deleveraging is a short-term headwind, but analysts also point out that in the longer term, the equity supply-demand structure remains positive and will provide support once deleveraging pressures subside.

Analysts summarized forecasts for capital flows from various investor types:

On the demand side:

Retail investors are the biggest support force. Year-to-date inflows have reached about $550 billion, and are expected to exceed $1 trillion for the full year, with about $482 billion expected to flow in during the second half.
Sovereign wealth funds/central banks: Expected to contribute about $110 billion in equity demand for the full year, half of which will be in the second half.
Equity long-short hedge funds (about $1.4 trillion AUM): Year-to-date net buying of about $20 billion, but analysts expect almost no further room for increased positions in the second half.
CTA trend-following funds: momentum signal z-score of about 1.0, expected net buying near zero in the second half.

On the pressure side:

Pension funds and insurance companies: Structurally reducing equity holdings, with net sales expected to reach about $470 billion for the full year 2026, about $235 billion in the second half.
Balanced mutual funds: Year-to-date net sales of about $210 billion in equities, mainly concentrated in June.

Overall, analysts expect total net equity demand in 2026 to be about $475 billion, net supply about $200 billion (including three major AI-related IPOs), net demand about $275 billion, of which about $197 billion will be in the second half.

Analysts especially note this positive supply-demand balance does not contradict deleveraging pressures—"The deleveraging process may dominate the market over the coming months, causing large price swings, while the equity supply-demand balance is more like a long-term background force that will provide support after deleveraging subsides."

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