The Sword of Damocles Hanging Over the AI Bull Market: Not Just Korea—U.S. Stock Leverage Is Just as Alarming

Global stock markets have repeatedly hit new highs driven by the AI wave, but the fuel supporting this rally is increasingly dangerous—from the US to South Korea, margin debt and leveraged ETF sizes have climbed to historical limits, and the pro-cyclical nature of leverage itself is magnifying the tail risks of market volatility exponentially.

US margin debt surged 54% year-over-year in May, reaching a historical peak of $1.4 trillion; at the same time, total assets under management in leveraged ETFs nearly doubled in less than 70 days, surpassing $220 billion around June 3 (FactSet data). The risks of this leveraging frenzy have first materialized in the South Korean market: South Korea's KOSPI index plummeted 10% last week, triggering a circuit breaker, then rebounded sharply, only to trigger another circuit breaker. The violent fluctuations dragged down US AI-related stocks in tandem.

Alarms subsequently rang on Wall Street. Barclays analyst Alexander Altmann warned clients this week that leveraged funds have accumulated about $300 billion in derivatives linked to individual stocks and indices since the end of March. If this scale needs to be unwound in a concentrated manner in the short term, "the impact is chilling," and he characterized it as "unquestionably the largest source of non-discretionary risk in the market today." Morgan Stanley also issued a warning on June 15, stating that the marginal buyers of US stocks are more dependent on leveraged financing than ever before, and this financing is becoming more expensive and scarcer. Charles Schwab, one of the largest US brokerages, has tightened margin requirements this month and issued margin calls to clients exceeding the new thresholds.

All of this points to the same logic: when a leverage-driven rally reaches its limit, the deleveraging backlash will amplify the decline by the same multiple.

US Stock Leverage: Size and Intensity Hit Records

The enthusiasm of US investors for borrowing to buy stocks has now reached an unprecedented level.

According to data from the Financial Industry Regulatory Authority (FINRA), US stock margin debt grew 54% year-over-year in May, hitting a historical peak of $1.4 trillion. Parallel to this is the explosive expansion of the leveraged ETF market—these products typically track two or three times the daily return of the underlying asset. According to FactSet data, total assets under management for leveraged ETFs surged from about $115 billion to $220 billion between March 30 and June 3.

The most sought-after products are concentrated in technology and semiconductor stock indices, as well as single-stock leveraged funds for Tesla, Nvidia, and even SpaceX recently. The Direxion 3x Bull Semiconductor ETF, tracking the semiconductor index, had a cumulative gain of about 700% from late March to late June—but then plummeted 31% in a single day on June 5, amplifying the benchmark index's decline threefold.

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

"I'm worried that we're accumulating a hidden leverage that isn't fully understood. Some people, with a lottery mentality, are borrowing money to buy options on leveraged ETFs—that is three to four layers of leverage."

Derivatives Mechanism: A Pro-cyclical Amplifier

The danger of leveraged ETFs lies not only in their own profit-and-loss amplification mechanism, but also in that they may in turn distort the price movements of the underlying assets they track—what market participants call the "tail wagging the dog" effect.

Barclays estimates that to absorb the continuous influx of new funds, leveraged funds have accumulated about $300 billion in derivative contracts linked to individual stocks and indices since the end of March. Market makers, after taking on these contracts, need to buy the corresponding spot stocks in the opposite direction to hedge their own exposure, thereby further boosting the gains in technology and semiconductor stocks this year.

The problem is that this mechanism also works in reverse and is self-reinforcing. Once the underlying stocks fall, the assets of leveraged funds shrink, forcing them to reduce positions, which in turn drives down stock prices, triggering more redemptions and position reductions, forming a negative spiral.

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

"Any market with a known, price-insensitive buyer or seller is going to have problems. I'm really concerned that more and more money is flowing into this system of leveraged single-stock products, because the more money that goes in, the stronger this pro-cyclical trading effect becomes."

Warning from South Korea: Extreme Concentration Plus High Leverage

The scene in the South Korean market this week is regarded by market participants as a stress test sample for reference.

According to a CICC research report, the KOSPI index has risen 87% year-to-date, leading the global market, primarily driven by memory chip leaders such as Samsung Electronics and SK Hynix. However, the highly concentrated holding structure combined with extreme leverage has sharply increased market fragility: On Tuesday, due to market concerns about memory chip expansion plans and the impact of domestic discussions on taxing unrealized gains, the KOSPI plummeted 10% in a single day, triggering a circuit breaker; it then rebounded strongly over the next two trading days, returning to the 9000 level, only to trigger another circuit breaker on Friday.

CICC estimates that the current on-exchange leverage multiple in the South Korean market ranges from 2x to 5x, with broad leverage reaching 271 trillion Korean won, an absolute level hitting historical highs—theoretically, a decline of 16% to 36% in the underlying assets could trigger margin calls. According to the Wall Street Journal, leveraged fund-related trades tracking Samsung and SK Hynix recently accounted for 50% of the average daily trading volume of these two stocks, significantly disrupting stock prices in both directions of rise and fall.

Lee Chan-jin, governor of the South Korean Financial Supervisory Service, said bluntly at a press conference last week that he regretted not being able to prevent the issuance of leveraged single-stock funds: "These are high-risk products, and about 92% of holders are retail investors. Despite consumer warnings, trading enthusiasm has not cooled down."

Financing Costs Soaring: Borrowing to Buy Stocks Is Getting More Expensive

According to a previous article by Wall Street Insights, Morgan Stanley's analysis revealed the accumulation of pressure from another dimension.

The core indicator measuring stock financing costs—the AXW futures (tracking the spread between the implied financing rate of S&P 500 total return futures and the benchmark SOFR rate)—the one-month contract expiring in June once surged to +140 basis points last week. Even though the S&P 500 subsequently pulled back from its historical highs, the indicator remained at extremely high levels, setting a record high since December 2020 (excluding the year-end special period).

Meanwhile, data from the Federal Reserve Bank of New York shows that as of the week ending June 3, 2026, US primary dealers' equity exposure held through securities financing methods such as repos reached $223 billion, a record high. The "stock financing dependency" indicator constructed by Morgan Stanley—primary dealers' stock repo size divided by the free-float market capitalization of the S&P 500—has surged nearly 50% over the past year, approaching the historical peak of mid-March this year, meaning that the borrowing funds accumulated behind each dollar of market value are becoming more dense.

This financing demand is highly concentrated in a few sectors. Morgan Stanley's industry breadth data shows that over the past three months, only the Information Technology sector among the 11 GICS sectors outperformed the S&P 500, with a gain of 24.2% and excess return of 13.3%; over the past year, on about 70% of trading days, the number of sectors outperforming the market did not exceed five. This means that the overall market rally is actually supported by leveraged funds in a very small number of sectors. Once this capital begins to withdraw, the impact on the overall market will be amplified simultaneously.

Once Deleveraging Begins, the Impact Will Be Amplified Multiple Times

Morgan Stanley warns that the current situation has constituted a potential non-linear risk: High financing costs force leveraged buyers to be unable to continue adding positions, the disappearance of marginal buyers robs the market of upward momentum, the subsequent price correction will trigger deleveraging, selling pressure is then amplified by leverage, and ultimately the decline exceeds expectations. Historical data shows that the interim highs of AXW futures often closely coincide with the interim tops of the S&P 500.

More alarmingly, Morgan Stanley's Financial Conditions Index shows that from the outbreak of the Iran conflict to June 11, financial conditions tightened by the equivalent of a 31-basis-point rate hike, driven mainly by the rise in the 10-year US Treasury yield and the appreciation of the US dollar. However, because the stock market index level is still rising, most investors are unaware of this tightening—the stock market's rise itself contributed about -21 basis points of easing effect on financial conditions, somewhat masking the pressure from other factors.

Morgan Stanley's baseline forecast is that the Federal Reserve will cut interest rates by 25 basis points each in March and June 2027, with the final policy rate target range falling between 3.00% and 3.25%. However, the bank warns that once deleveraging triggers a stock market decline, investors will be forced to reassess financial conditions, and then reprice the Fed's policy path. The pricing weight on tail risks of rate hikes will be the first to collapse.

Alexander Altmann wrote in a note to clients: "The technical forces that previously magnified upward momentum through leverage expansion may begin to cut in the opposite direction."

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