Leverage driving US stock rally sparks growing unease among market watchers

Margin debt hit a record $1.42 trillion in May 2026, according to FINRA data. That’s an 8.5% jump from April alone and a 53.7% surge compared to the same time last year.

The leverage machine under the hood

Leveraged ETFs have swelled to roughly $179 billion in assets by mid-May. A full 85% of those leveraged ETF assets sit in just three sectors: technology, artificial intelligence, and semiconductors.

Nomura strategist Charlie McElligott flagged the mechanical risks embedded in this setup. Rebalancing flows from leveraged ETFs contributed over $100 billion in net buying over the prior month, with $38.1 billion flowing specifically into semiconductors. These products need to buy more of what’s going up and sell more of what’s going down, every single day. When things are rising, that creates a self-reinforcing loop of buying pressure that makes gains look more organic than they actually are.

McElligott noted that the combination of negative gamma from options positioning, leveraged ETF rebalancing, and volatility-control strategies has created what amounts to a fragile positive-feedback loop. Everything works beautifully on the way up. The problem is that the same mechanics work in reverse, and they work fast.

The credit balance tells its own story

The investor net credit balance plunged to a record low of negative $991.7 billion as of May 2026. That metric measures the difference between what investors have in their margin accounts as cash versus what they’ve borrowed. A deeply negative number means investors are overwhelmingly using borrowed funds rather than sitting on cash reserves.

Major surges in margin debt have preceded or coincided with market peaks in March 2000, right before the dot-com crash. In July 2007, months before the financial crisis. And in October 2021, ahead of the brutal 2022 drawdown.

What this means for investors

If semiconductor stocks drop 3% in a session, leveraged ETFs tracking that sector need to sell additional shares at the close to maintain their target exposure ratios. That selling pressure pushes prices lower, which triggers more rebalancing, which pushes prices lower still. The $38.1 billion in semiconductor rebalancing flows that helped drive prices higher can just as easily become a significant headwind.

With margin debt up 53.7% year-over-year while equity indices have delivered strong but not comparably explosive returns, that gap is widening in a direction that has historically rewarded caution over confidence.

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