Borrowed Money Fueling Market Rally Raises Leverage Fears

U.S. margin debt has reached a historic peak of $1.02 trillion in July 2025, marking a $14.6 billion increase for the month, according to the latest data from the Financial Industry Regulatory Authority (FINRA). This follows a record-breaking $87 billion surge in June, the largest single-month rise in margin debt ever recorded. Over the past two years, margin debt has grown by $400 billion, a 67% increase that outpaces the performance of the equity markets themselves [1]. Adjusted for inflation, the current level remains slightly below the October 2021 peak but exceeds all previous peaks in recent history in terms of GDP share, including the 2000 Dot-Com era, with the exception of the same 2021 high. This rapid growth in leveraged investing has raised concerns among analysts, who note the increasing fragility of the stock market rally, which is now largely fueled by borrowed money [2].

The surge in margin debt reflects a broader trend of speculative activity in U.S. markets, with investors increasingly relying on leverage to amplify returns. While this has contributed to a strong upward trajectory for major indices such as the S&P 500, it has also increased systemic risk, particularly in the event of a market correction. Historical patterns show that sharp increases in margin debt often precede significant market downturns, as leveraged positions are liquidated under pressure, exacerbating volatility. Analysts have drawn comparisons to the 2008 financial crisis and the 2022 cryptocurrency winter, both of which followed similar spikes in leverage [2]. The current environment, therefore, presents both opportunities and heightened risks for traders, particularly in sectors where correlations between traditional and crypto markets are becoming more pronounced.

Credit rating agencies remain cautiously optimistic about the U.S. fiscal outlook, despite the growing burden of debt. S&P Global reaffirmed the U.S. credit rating at AA+ in its most recent assessment, citing the strength of the economy, institutional stability, early monetary policy interventions, and the dollar’s dominance in global reserves. While the outlook remains stable, S&P acknowledges the challenges posed by increasing deficits, which are projected to remain elevated over the next several years. The firm estimates that the deficit will decline to 6% of GDP by 2028 from 7.5% in 2024, supported by robust tariff revenue expected from the Trump administration’s One Big Beautiful Bill Act. These tariffs are projected to generate between $300 billion and $400 billion annually, according to the Congressional Budget Office, which is factored into long-term deficit forecasts [1]. However, the sustainability of these projections remains uncertain, particularly in light of a pending court case challenging the legality of these duties.

The potential legal challenge to the Trump administration’s tariff policies poses a significant risk to fiscal projections and the stability of the current economic environment. The U.S. Court of Appeals is currently reviewing a case questioning the legality of reciprocal tariffs under the International Emergency Economic Powers Act. A ruling against the administration could dismantle the revenue stream that underpins current deficit forecasts, with potential consequences for public services and entitlement programs such as Social Security and Medicare. The Department of Justice has warned that the removal of these tariffs could lead to widespread economic disruption, including job losses and home foreclosures. The uncertainty surrounding this case highlights the fragile balance between fiscal expansion and regulatory scrutiny, with broader implications for both domestic and global markets [1].

In contrast to S&P’s cautious optimism, Fitch Ratings has taken a more pessimistic view of the U.S. fiscal outlook. While the agency also reaffirmed the AA+ credit rating, it projects that the deficit will rise again after an initial decline. Fitch expects the deficit to drop to 6.9% of GDP in 2025 but to climb again to 7.8% in 2026 and 7.9% in 2027, driven by declining government revenues and the implementation of new tax cuts under the One Big Beautiful Bill Act. These cuts include additional deductions for tips, overtime, and state and local taxes, which Fitch warns will erode revenue even as tariff receipts remain strong. The agency’s outlook underscores the growing divergence between credit rating firms and highlights the uncertainty surrounding the U.S. fiscal path in the coming years [1].

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[1] U.S. margin debt hits new all-time high $1.02 trillion as ... (https://www.mitrade.com/insights/news/live-news/article-3-1068048-20250826)

[2] US Margin Debt Hits Record $1.02 Trillion in July After $87B Historic June Jump, per @KobeissiLetter (https://blockchain.news/flashnews/us-margin-debt-hits-record-1-02-trillion-in-july-after-87b-historic-june-jump-per-kobeissiletter)