The US stock rally is being fueled by borrowed money, but the cost of this money is increasing, causing concerns among investors. According to a report by Reuters, the inflows into leveraged exchange-traded products, rising stock options trading volumes, and record hedge-fund exposure are straining the global balance-sheet capacity of large banks that offer equity financing, driving up the costs of the loans that underlie much stock trading.

Surging Demand Drives Financing Costs

Stocks have rallied in 2026, pushing the Nasdaq Composite Index to 20 record closes this year, as AI spending on chips and other goods drives surging profit growth while investors remain confident the US economy can avoid a recession. However, the rising costs of borrowed money may impact the stock market, as some trades using borrowed money may become too expensive to attempt.

Primary dealers, banks that trade directly with the Federal Reserve and facilitate markets across the financial world, are carrying record equity repo exposure, surpassing $220 billion. The cost of financing is reflected in the spread between implied financing rates for S&P 500 total-return futures and benchmark rates such as SOFR, which is at a record high in data going back to late 2020.

Broader Funding Remains Accommodative

While the cost of borrowed money is increasing, the Treasury repo market has remained accommodative. Changes to the Supplementary Leverage Ratio, a rule governing how much capital large banks must hold relative to their total assets, have given large US banks more room to handle government bond trades. However, equity financing is more capital-intensive and consumes more liquidity under bank rules.

Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.