Key Takeaways:
A normalization phase in investor leverage that began in June will continue to act as a tactical headwind for equities through at least October, according to JPMorgan.
US equities face at least three more months of deleveraging pressure across leveraged ETFs, options and margin accounts, JPMorgan said, extending a process that began in June.
"The deleveraging process may dominate the market over the coming months, causing significant price volatility," Nikolaos Panigirtzoglou, managing director of global market strategy at JPMorgan, said in the bank's Flows & Liquidity report published July 15.
Leveraged ETF assets have shrunk 13% from their peak, with semiconductor-focused funds contracting 34%, the report shows. The retail bullish call buying indicator hit 14 million contracts on June 5, matching historical highs from October 2025 and November 2021 — levels that preceded multi-month tech corrections each time. The NYSE Net Debit Balance, a proxy for retail margin leverage, remains at extremes comparable to late 2021 and mid-2018 peaks.
The supply-demand backdrop provides a longer-term cushion — JPMorgan estimates net equity demand of about $197 billion in the second half, supported by $482 billion in projected retail inflows — but the near-term deleveraging dynamic is expected to dominate, keeping markets range-bound through October.
Leveraged ETFs Face a Structural Drag
The mechanical decay embedded in leveraged ETFs means range-bound trading erodes their size automatically. If an underlying index falls 10% one day and rebounds 11.1% the next, a 3x leveraged fund loses 30% then gains 33.3% — a net loss of 7%. This built-in decay has reduced total leveraged ETF assets by 13% from their peak, but the ratio of leveraged ETF size to underlying market capitalization remains elevated relative to history.
JPMorgan estimates it will take approximately three more months of range-bound trading for that ratio to return to pre-April levels. New capital continued flowing into leveraged ETFs in July, extending the timeline. The problem is not confined to any single sector — the ratio for all leveraged stock ETFs is high relative to its own history, indicating a systematic risk across the entire market.
Options and Margin Accounts Still Elevated
The retail bullish call buying indicator tracked by JPMorgan has fallen from its June 5 peak of 14 million contracts, but the bank said it needs to drop to between 2 million and 4 million — a "capitulation" level — before tech stocks can stabilize. Historical patterns show each prior peak triggered multi-month adjustments.
Margin debt presents a similar challenge. The NYSE Net Debit Balance is at levels that preceded extended market corrections in late 2021 and mid-2018. While the metric has shown early signs of decline, JPMorgan said "a significant amount of deleveraging is still needed before they cease to be a major drag on the stock market."
Hedge funds, by contrast, have largely normalized. Equity long/short funds posted positive returns in June despite the broader market decline, aided by semiconductor strength. But their correlation with chip stocks has declined in July, and high-frequency leverage indicators suggest reduced exposure to the sector.
JPMorgan's full-year net equity demand estimate of about $275 billion — with roughly $197 billion concentrated in the second half — provides a structural backstop, but the bank said the deleveraging process will likely dominate price action in the near term.
This article is for informational purposes only and does not constitute investment advice.
