Wall Street Banks Warn of Bubble Risks as Market Speculation Surges

As the U.S. stock market revels in a series of new highs, major investment banks on Wall Street have collectively sounded the alarm: current market speculation is surging, leverage levels are soaring, and bubble risks are accumulating.

On Friday, Goldman Sachs strategists warned of increased high-risk activities in the U.S. stock market, with indicators of market speculative sentiment surging to historical highs, second only to the 2000 internet bubble and the 2021 retail trading frenzy.

Deutsche Bank, meanwhile, has focused on market "leverage," warning that the scale of investors borrowing money to trade stocks has reached a "boiling point," with the total margin debt exceeding 1 trillion dollars in June for the first time in history.

Michael Hartnett of Bank of America reiterated the bubble risk, noting that monetary easing and relaxed financial regulation are driving up the level of market bubbles. He stated, "The larger the retail scale, the greater the liquidity, the greater the volatility, and the larger the bubble."

Additionally, strategists from JPMorgan and UBS have warned that the market may be overly complacent about persistent trade risks, with next week's focus on the Federal Reserve's policy meeting to seek clues on the path to rate cuts.

Goldman Sachs' strategy team, led by Ben Snider, pointed out that speculative trading activities are fueling market short covering. The firm's speculative trading index shows that, apart from the periods 1998-2001 and 2020-2021, current speculative levels have reached historical highs.

Among them, the stock basket with the highest proportion of short positions to circulating shares has risen by more than 60%. While this activity suggests that the overall market may have room to rise in the near term, it also increases the risk of a final decline.

This indicator reflects the recent increase in the proportion of trading volume of stocks with no earnings, low prices, and high valuation multiples. The most actively traded stocks include most of the "seven giants" and companies involved in digital assets and quantum computing.

Deutsche Bank's credit strategy team, led by Steve Caprio, warned that the level of margin debt for investors borrowing to buy stocks on the NYSE has begun to "overheat," posing a potential threat to the credit market.

Data shows that brokers lent more than 1 trillion dollars to clients in June, surpassing this whole number milestone for the first time in history. In the two months ending June 30, NYSE margin debt surged 18.5%, the fastest pace of investors leveraging to buy U.S. stocks since the end of 1999 or mid-2007.

Caprio stated that margin debt reaching a "white-hot" level could ultimately harm credit performance. The current rate of margin debt growth suggests that the U.S. high-yield credit spread may widen by 80 to 120 basis points over the next 12 months.

Deutsche Bank strategists believe that unless there is an unexpected tariff cut or the Federal Reserve takes a more dovish stance than investors expect, the market rally may be difficult to sustain.

Bank of America's Michael Hartnett strategy team believes that as monetary policy eases and financial regulation relaxes, the risk of stock market bubbles is rising. Global policy rates have fallen from 4.8% a year ago to 4.4%, and are expected to fall further to 3.9% over the next 12 months.

At the same time, policymakers are considering regulatory reforms to increase the proportion of retail investors in the United States.

Hartnett wrote in a report, "More retail investors, more liquidity, greater volatility, and larger bubbles."

This strategist previously accurately predicted that other regional stock markets would outperform U.S. stocks this year and warned in December that the stock market would begin to show signs of a bubble after a strong rally in 2024.

In June, he stated that based on expected rate cuts, the stock market could ultimately fall into a bubble. Despite the fact that the U.S. stock market has repeatedly set new highs driven by economic resilience and optimistic corporate earnings sentiment, the benchmark S&P 500 index still lags behind its international peers this year.