The shadow of deleveraging in the US stock market has not yet dissipated.
According to a report from JPMorgan Chase's global market strategy team on July 15th, the investor deleveraging process that began in June is still ongoing. There is further room for deleveraging in three key areas: leveraged equity ETFs, the options market, and margin accounts. This is expected to continue weighing on stock market performance for the coming months.
They estimate that it would take roughly three more months of choppy market conditions for the size of leveraged equity ETFs relative to their underlying market capitalization to return to the levels seen prior to April.
The Leveraged ETF Conundrum: A Mathematical Trap with a Long Road Ahead
The issue with leveraged equity ETFs is, at its core, a mathematical trap.
The bank explained the logic: if an underlying index falls 10% one day and rebounds 11.1% the next to return to its original level, a 3x leveraged ETF would lose 30% on the first day and gain 33.3% on the second, resulting in a net loss of 7%. This means choppy market conditions themselves erode the size of leveraged ETFs, a built-in "self-correcting" mechanism.
Data already confirms this. Analyst figures show that since their peak, leveraged semiconductor memory stock ETFs have shrunk by 34%, while the size of all leveraged equity ETFs has contracted by 13%.
The problem, however, is that the decline in their size relative to the market cap of the underlying stocks is far less pronounced.
JPMorgan analysts noted that the ratio of size to underlying market cap for leveraged semiconductor memory ETFs is three times the average for all equity ETFs, explaining why volatility in these stocks is much higher than the broader market. More alarmingly, even for broad leveraged equity index ETFs, this ratio remains high relative to its own history, indicating this is not just a sector-specific issue but a systemic risk for the entire market.
The analysts concluded: "It would take approximately three more months of range-bound, choppy trading for the ratio of leveraged equity ETF size to underlying market cap to revert to pre-April levels."
Furthermore, continued inflows of new money into leveraged ETFs in July are further extending the timeline required for deleveraging.
Options and Margin Accounts: Two Danger Zones for Retail Investors
In the options market, a retail call-buying indicator tracked by JPMorgan analysts (based on OCC data for clients holding fewer than 10 contracts) peaked at nearly 14 million contracts on June 5th, matching historical highs from October 2025 and November 2021.
Historical patterns show that after each such peak, technology stocks experienced months of adjustment, with the bottom often corresponding to the indicator falling to a low of 2 to 4 million contracts. While the indicator has retreated significantly from its peak, analysts believe that if it ultimately falls to the "capitulation" level of 2-4 million contracts, tech stocks could still face sustained pressure.
The situation with margin accounts is even more severe. Using the NYSE Net Debit Balance as a proxy for US individual investor leverage, analysts point out that current levels are at historically extreme highs, comparable to peaks seen in late 2021 and mid-2018—both of which were followed by months of stock market adjustment.
The analysts noted that while margin accounts have shown some recent signs of pulling back, "a significant amount of deleveraging is still needed before it ceases to be a material headwind for equities."
In contrast, risk parity fund leverage has largely normalized and is no longer a primary source of market resistance.
Hedge Funds: Semiconductor Exposure May Have Quietly Shrunk
At the hedge fund level, the bank's data reveals an interesting shift.
In June, despite declines in the S&P 500 and Nasdaq, equity long/short hedge funds and technology/media/telecom sector funds posted positive returns of 1.2% and 3.7%, respectively. Analysts attribute this closely to strength in the semiconductor sector—the SMH semiconductor ETF rose 9.5% in June, while US mega-cap cloud stocks fell 14.5% over the same period.
However, signals changed in July. The daily-reported correlation between equity long/short funds and semiconductor stocks has declined noticeably. The analysts' high-frequency leverage proxy also shows leverage levels receded in July—after this indicator had climbed in June to its highest level since 2017.
Based on this, JPMorgan judges that equity long/short hedge funds may have already reduced their semiconductor exposure in July.
Second-Half Supply and Demand: Retail Flows Are the Primary Support
While deleveraging is a near-term headwind, the analysts also noted that, from a longer-term cyclical perspective, the equity supply/demand structure remains positive and will provide support once deleveraging pressures subside.
The analysts aggregated flow forecasts for various investor types:
On the demand side, retail investors are the strongest supporting force. Year-to-date inflows have reached approximately $550 billion, with full-year expectations exceeding $1 trillion. An estimated $482 billion in further inflows is projected for the second half.
Sovereign wealth funds/central banks are expected to contribute roughly $110 billion in equity demand for the full year, with about half of that in the second half.
Equity long/short hedge funds (with about $1.4 trillion in assets under management) have been net buyers of around $20 billion year-to-date, but analysts expect little room for further positioning increases in the second half.
CTA trend-following funds, with a momentum signal z-score around 1.0, are projected to have net purchases close to zero in the second half.
On the supply/pressure side, pensions and insurance companies are structural sellers of equities. They are forecast to be net sellers of approximately $470 billion for full-year 2026, with about $235 billion of that in the second half.
Balanced mutual funds have been net sellers of about $210 billion in equities year-to-date, concentrated mainly in June.
Overall, analysts estimate full-year 2026 net equity demand of about $475 billion, net supply of about $200 billion (including three major AI-related IPOs), resulting in net demand of approximately $275 billion. About $197 billion of this net demand is projected for the second half.
The analysts specifically noted that this positive supply/demand balance does not contradict the near-term deleveraging pressure: "The deleveraging process is likely to dominate the market in the coming months, causing significant price volatility, while the equity supply/demand balance acts more as a background, longer-term force that will provide support once deleveraging subsides."
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