When markets are rising, it’s easy to overlook how the gains are being made.
Right now, part of the answer is leverage, and it’s rising.
Investors are increasing equity exposure, much of it tied to optimism around the AI-driven earnings boom. Banks are extending some of the largest amounts of leverage on record, giving clients the ability to amplify returns in a market that’s already running hot.
On the surface, it looks like confidence. Underneath, it can quietly build fragility.
Because leverage cuts both ways. It can amplify returns when markets rise, but it can just as easily amplify losses when they fall.
And, when leveraged positions face pressure during a decline, forced unwinds can intensify selling, increase volatility, and accelerate drawdowns.
Periods of rising leverage have historically coincided with growing fragility beneath strong-looking markets, even when fundamentals appeared to justify the optimism at the time.
Strong earnings are supporting markets today. But the structure underneath could be becoming more sensitive to shocks.
