Deleveraging Is Not Yet Over, Pressuring Equities in the Short Term; Supply and Demand Still Support the Second Half
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Deleveraging Is Not Yet Over, Pressuring Equities in the Short Term; Supply and Demand Still Support the Second Half
JPMorgan believes deleveraging in equity ETFs, options, and margin accounts may continue for around three months, but roughly $200 billion of global equity net demand in the second half of 2026 could still provide a supportive backdrop.
- Investor deleveraging, which began in June, remains under way, and leveraged equity ETFs, options, and margin accounts may all continue to pose headwinds for equities.
- Assets under management in leveraged memory-chip ETFs have fallen 34% from their June peak, while all leveraged equity ETFs are down 13%; however, leverage relative to underlying market capitalization still needs time to normalize.
- Implied leverage in risk-parity funds has largely normalized and is no longer a significant headwind for equity markets.
- Retail call-option buying activity and hedge-fund leverage show signs of easing, but margin-account leverage remains at historical highs.
- The report forecasts global equity demand of about $475 billion and supply of about $200 billion in 2026, for net demand of about $275 billion, of which around $200 billion may materialize in the second half.
Report interpretation
Overview
This report tracks cross-asset flows, positioning, leverage, and liquidity indicators. Its central conclusion is that the investor deleveraging process is not yet complete and could cause significant equity-price volatility in the short term; however, from the perspective of longer-term global equity demand and supply, positive net-demand support remains in the second half.
Core views
Although leveraged equity ETF assets have declined, they remain elevated relative to underlying market capitalization. Combined with deleveraging in options and margin accounts, this leaves equity markets under pressure over the coming months. Risk-parity fund leverage has normalized, while equity long-short hedge funds have also shown some deleveraging. Over the medium to long term, continued retail inflows and demand from sovereign wealth funds and central banks may partly offset structural selling by pension and insurance institutions as well as new equity supply.
Analysis framework
The report combines CFTC futures positioning, ETF and mutual-fund flows, options activity, NYSE margin debt net debit balances, fund-return regressions, risk-parity leverage proxy indicators, short-interest data, and cross-asset liquidity indicators to assess changes in equity demand, leverage, and positioning across investor groups.
Methodology notes
Aggregating multiple positioning proxy indicators by percentile
Aggregates futures positioning, trend momentum, fund beta, risk-parity leverage, hedge-fund beta, client surveys, nonbank investor allocations, and short-selling indicators to characterize current cross-asset positioning.
Momentum signal z-scores
Calculates weighted-average z-scores for short- and long-term momentum signals for the S&P 500, Nikkei, EuroStoxx 50, FTSE 100, and MSCI Emerging Markets Index to proxy CTA positioning.
Aggregating net demand and net supply by investor type
Separately estimates flows from hedge funds, CTAs, risk-parity funds, balanced funds, pension funds, insurance institutions, sovereign wealth funds, central banks, and retail investors, and compares them with equity issuance supply.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Global EquitiesPressured by deleveraging in the short term and supported by a positive supply-demand balance over the medium to long term
- Strengths
- Strong retail inflows, with sovereign wealth funds and central banks expected to provide demand; positive net demand is still expected in the second half of 2026.
- Weaknesses
- Leverage in leveraged ETFs, retail options, and margin accounts remains elevated; pension and insurance institutions continue structural reductions.
- Comparison
- Risk-parity fund leverage has normalized, making it less of a headwind for equities than leveraged ETFs and margin accounts.
- Risks
- If deleveraging accelerates, it could trigger larger price swings; new equity issuance could further increase supply.
- Technology Stocks and SemiconductorsMore sensitive to deleveraging in retail options and hedge funds
- Strengths
- Semiconductors materially outperformed U.S. mega-cap cloud-computing-related stocks in June, supporting equity long-short hedge-fund performance.
- Weaknesses
- Daily data suggest that equity long-short hedge funds may have reduced semiconductor exposure in July.
- Comparison
- Compared with the broader equity market, technology stocks are more aligned with retail investors' preferred trading venues and are therefore more susceptible to cooling retail options activity.
- Risks
- If retail option buying continues to decline toward historical clearing ranges, technology stocks could face adjustment pressure for several months.
- BitcoinImproving futures flows provide a marginally positive signal
- Strengths
- Despite volatile spot Bitcoin ETF flows, CME and perpetual Bitcoin futures have seen positive flow impulses; leveraged MicroStrategy ETFs have recorded relatively stable inflows over the past seven weeks.
- Weaknesses
- Recent spot Bitcoin ETF inflows and outflows have alternated, leaving flows unstable.
- Comparison
- Futures markets are more likely to reflect institutional rather than retail participation, and their improvement contrasts with spot ETF outflows.
- Risks
- Whether MicroStrategy-related investor sentiment and its treasury policy can continue improving Bitcoin sentiment remains uncertain.
Key data
- Leveraged memory-chip ETF assets under managementDown 34% from the June peakThe report believes that the ratio relative to underlying market capitalization may still require around three months of choppy consolidation to return to pre-April levels.
- All leveraged equity ETF assets under managementDown 13% from the June peakInflows persisted in July, potentially extending the time required for assets to normalize.
- Peak retail call-option buying proxy indicatorNearly 14 million contractsIt fell significantly after peaking on June 5; historically, declines to 2 million to 4 million contracts have coincided with periodic clearing in technology stocks.
- Equity long-short hedge fund assets under managementApproximately $1.4 trillionThe report estimates that their positive equity demand year-to-date in 2026 is about $20 billion, but there is limited room to raise beta further before year-end.
- CTA net equity purchases year-to-date in 2026Approximately $20 billionThe momentum z-score is currently about 1.0, and the report expects it to remain around 1.0 near year-end, implying limited net buying in the second half.
- Year-to-date equity selling by U.S. balanced mutual fundsApproximately $210 billionThe report interprets this estimate cautiously because part of the change was affected by a sharp decline in stock-bond correlation.
- Forecast 2026 net equity selling by pension and insurance institutionsApproximately $470 billionOf this, about $235 billion may occur in the second half of 2026.
- Forecast 2026 retail investor equity flowsAn annualized pace exceeding $1 trillion for the full yearAs of mid-July, net inflows into equity funds were about $550 billion; the report expects roughly another $480 billion of inflows during the remainder of the year.
- Forecast 2026 global net equity supplyApproximately $200 billionDriven by large artificial-intelligence-related initial public offerings and recent equity-financing plans, remaining supply for the year is expected to be about $90 billion.
- Forecast 2026 global net equity demandApproximately $275 billionTotal equity demand is about $475 billion, of which the report expects around $200 billion to occur in the second half of 2026.
Impact & implications
In the short term, deleveraging is likely to dominate markets, potentially generating high volatility and range-bound trading, while exerting greater pressure on technology stocks, memory chips, and sectors with high retail participation. Once leveraged ETF assets, options speculation, and margin leverage contract further, retail inflows and a positive global equity supply-demand balance are expected to support equity markets.
Risks
- The deleveraging process may last longer than the roughly three months anticipated in the report.
- If margin-account leverage contracts more rapidly, it could amplify equity-market declines and volatility.
- If artificial-intelligence-related IPOs and follow-on financing exceed expectations, they could increase net equity supply.
- Rebalancing-related selling pressure from pension funds, insurance institutions, and balanced funds may be stronger than expected.
- Any weakening in retail flows would undermine the main support for the global equity supply-demand balance.
- Continued volatility in digital-asset ETF flows could weaken the marginal improvement signal for Bitcoin markets.
What to watch
- Whether leveraged equity ETF assets under management and their ratio to underlying market capitalization continue to decline.
- Whether NYSE margin debt net debit balances show a clearer decline.
- Whether net retail purchases of small-lot call options approach historical clearing ranges.
- Changes in beta, momentum z-scores, and futures positioning among equity long-short hedge funds and CTAs.
- Whether global equity fund and ETF flows can remain strong.
- Actual equity allocation flows from pension funds, insurance institutions, sovereign wealth funds, and central banks.
- The impact of artificial-intelligence-related listings and equity financing on global net equity supply.
- Changes in flows for spot Bitcoin ETFs, CME Bitcoin futures, and perpetual-contract open interest.