Three red lights are flashing in the U.S. stock market: speculation has reached a historical extreme, leverage has surpassed one trillion, and a larger bubble is brewing

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

On Friday, Goldman Sachs strategists warned of increased high-risk activities in U.S. stocks, noting that indicators measuring market speculation sentiment have soared to historic highs, second only to the 2000 internet bubble and the 2021 retail trading frenzy.

Deutsche Bank has focused on market "leverage," warning that the scale of investors borrowing money to trade stocks has become "overheated," with margin debt totaling over $1 trillion in June, a historic milestone.

Bank of America’s Hartnett also reiterated the bubble risk, pointing out that monetary easing and relaxed financial regulations are driving up the degree of bubble formation. He stated, "The larger the retail scale, the greater the liquidity, the greater the volatility, and the larger the bubble."

Additionally, JP Morgan and UBS strategists have warned that the market may be overly complacent about persistent trade risks, with next week's focus shifting to the Federal Reserve's policy meeting for clues on interest rate cuts.

Goldman Sachs: Speculative Frenzy at Historic Extremes

The strategist team at Goldman Sachs, led by Ben Snider, pointed out that speculative trading activities are fueling short covering in the market. The bank's speculative trading indicator shows that current speculation levels have reached historic highs, except for the periods of 1998-2001 and 2020-2021.

Among them, the basket of stocks with the highest proportion of short positions has risen over 60%. While this activity suggests there is room for an upward move in large-cap stocks, it also increases the risk of a subsequent decline.

The rise in this indicator reflects an increase in trading volume of unprofitable stocks, low-priced stocks, and stocks with excessively high valuations. The most actively traded stocks include most of the "seven giants" and companies involved in digital assets and quantum computing.

Deutsche Bank: Borrowing to Trade Approaching Dangerous Levels

The credit strategist team at Deutsche Bank, led by Steve Caprio, warned that the margin debt levels of NYSE investors borrowing to purchase stocks are starting to become "overheated," posing a potential threat to the credit market.

Data shows that brokers lent over $1 trillion to clients in June, marking the first time this milestone has been surpassed in history. In the two months leading up to June 30, NYSE margin debt surged by 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 "white-hot" levels could ultimately harm credit performance. The current growth rate of margin debt suggests that U.S. high-yield credit spreads could widen by 80 to 120 basis points over the next 12 months.

Deutsche Bank strategists believe that unless there are unexpected tariff cuts or the Federal Reserve adopts a more dovish stance than investors expect, the market frenzy may be difficult to sustain.

Bank of America: Easing Policies Creating Larger Bubbles

Bank of America’s strategist team, led by Michael Hartnett, believes that as monetary policy eases and financial regulations are relaxed, 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 further decline 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 his research report: "More retail investors, more liquidity, greater volatility, bigger bubbles."

This strategist had previously accurately predicted that stock markets in other regions would outperform U.S. stocks this year and warned in December that the stock market would begin to appear bubbly after a strong rise in 2024.

In June, he stated that based on expected interest rate cuts, the stock market could eventually fall into a bubble. Despite U.S. stocks reaching 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