Leveraged stock bets are ‘very concentrated in the AI ecosystem,’ Goldman Sachs warns
Key takeaways
- The inflow of money into U.S. equities is running well above the average this year, according to Christian Mueller-Glissmann and his team at Goldman Sachs.
- While leveraged investors can make more money on their trades by borrowing against their own stakes, they also stand to lose by a similar multiple if their bets go wrong.
- “Outside the U.S., margin purchases of Japanese equities have also climbed above $30 billion, the highest level since the GFC [Great Financial Crisis],” Mueller-Glissmann said in a note seen by Fortune.
The inflow of money into U.S. equities is running well above the average this year, according to Christian Mueller-Glissmann and his team at Goldman Sachs. One aspect of that is that “Investors are increasingly deploying leverage to participate in the equity rally,” they said in a recent note. “Net margin borrowing”—where traders magnify the effect of their bets by borrowing a multiple of their own money—is now at about $1.4 trillion. That’s the equivalent of 1.8% of all U.S. stocks.
While leveraged investors can make more money on their trades by borrowing against their own stakes, they also stand to lose by a similar multiple if their bets go wrong. That adds an extra level of risk into the market—traders forced to cover their losing bets may end up selling other stocks to raise cash, thus magnifying selling pressure in the markets.
“Outside the U.S., margin purchases of Japanese equities have also climbed above $30 billion, the highest level since the GFC [Great Financial Crisis],” Mueller-Glissmann said in a note seen by Fortune. “Investor leverage remains very concentrated in the AI ecosystem.”