Wall Street Running on Fumes? Why the US Stock Market Rally Is Losing Steam Despite Record Highs

The most structurally unstable market in US history is being created by leverage, short interest, and S&P 500 concentration.

A record-low of -$1.06 trillion was reached in June when net credit balances dropped -$70 billion. It is not a numerical value, but a signal. Since the bear market bottom in 2022, margin debt has increased by $895 billion, reaching a record $1.5 trillion.

In the past twelve months, investors have added over half a trillion dollars in leverage.

Market leverage is borrowing from a broker or financial institution to invest in one's portfolio.

Let that sink in.

In contrast, there was a positive net credit balance all through the Great Recession of 2008.

Amidst extensive deleveraging and a retreat to safety, investors possessed more cash on hand than margin debt.

There is a negative balance of more than one trillion dollars in the net credit as of today. There has never been a period in contemporary finance when risk appetite was so high.

The Leverage Ladder

The trajectory defines the story.

In the middle of 2025, the amount of margin debt surpassed $1 trillion.

Adding an additional 50% took about a year. Adding to May's 8.5% increase, June's total is up $86.5 billion month-over-month.

This isn't some slow ascent; it's a meteoric rise.

In June, the ratio of margin debt to the money supply (M2) reached an all-time high of 6.5%. That's higher than both the 5.6% peak before the crisis in 2008 and the 6.4% peak during the Dot-Com bubble in 2000.

Leverage is at an all-time high among investors.

Simple yet cruel: when markets rise, leveraged investors reap disproportionate benefits, prompting them to take out even more loans.

Margin calls force investors to sell when markets are weak because they are the ones who stand to lose the most.

Leverage amplifies the positive and amplifies the negative.

The Dollar's Slow Bleed

The purchasing power of $100 since the Federal Reserve was created tells a parallel story:

The buying power of one US dollar has decreased by 97%.

This isn't just inflationary noise; it's systemic currency debasement, the slowly eroding value that drives capital into risky assets not because they're fundamentally solid but because cash is an absolute loser.

Using trade weights as a measure, the dollar has lost almost 10% of its value in the last year.

Currently, the Federal Reserve is still planning to cut interest rates before the end of the year. Kevin Warsh's presence heralds additional dovishness; he was probably expected to prove his propensity for cutting rates in order to secure President Trump's selection.

As investors pour into dollar-denominated leverage, this Fed is working to devalue the currency. A large-scale episode of volatility is sure to result from that.

The Great Short Squeeze Setup

On the other hand, short interest in the S&P 500 has increased to approximately 3.7% of the free float.

S3 Partners data going back to 2010 shows this to be a record high, not just a high for the past fifteen years.

As for the Russell 3000, it has also reached a record high of 6.3%. With short interest at 2.7%, the Nasdaq 100 is at its highest level in six years, while the Russell 2000 is at its highest level in fifteen years, at roughly 5.0%.

The paradox is in the fact that hedge funds are taking a risk by betting against a market that is experiencing unprecedented earnings growth and is trading near record highs.

Both short-term interest and leverage are extremely high. A small correction is not in the cards for this market.

It's a market where short sellers are aggressively squeezed or leveraged long sellers are tragically lost.

The structural integrity is jeopardized.

The AI Earnings Mirage

In the June quarter, the net profit margin of the S&P 500 is expected to reach 15.7%, which is the highest level recorded since 2009.

This would be the tenth consecutive quarter of growth if the present margin persists.

Of the S&P 500 companies that have reported earnings, 86% have surpassed earnings per share projections and 80% have surpassed revenue targets.

A corporate earnings boom appears to be taking place here.

But look closer, the story shows a different picture.

After wildly above profit projections, Alphabet is the biggest contributor to margin.

Earnings per share of $9.11 were a +216.32% surprise, higher than the $2.88 predicted by the Zacks Consensus Estimate.

Over the last week, the whole S&P 500 had a net dollar rise in earnings, with 92% of that increase coming from Alphabet alone.

Including Alphabet in the S&P 500's blended earnings growth rate brings it down from 37.9% to 25.9%.

However, that 25.9% number is also not accurate.

The $98 billion in "other income" that Alphabet received in the second quarter was mostly investment profits from SpaceX and "a private company" that were not realized.

Operating income is different from this.

Investments in venture capital only result in a paper gain.

Google Cloud's revenue increased 82% year-over-year to $24.8 billion, while operating income more than tripled to $8.8 billion, proving that Alphabet's AI revenue story is true.

Unrealized gains unrelated to Google's core business boost the headline earnings beat.

So, clearly, accounting optics are helping a small number of corporations achieve historic earnings growth driven by AI. However, even these companies aren't alone.

There is a tremendous risk of concentration.

The Wealth Distribution Fracture

President Trump told reporters on July 1: "You know why I'm making money? Because the stock market is going up - everyone is making money."

The data tells a different story.

The wealthiest one percent of American households owned around $27.64 trillion worth of corporation and mutual fund shares, according to figures from the Federal Reserve's Distributional Financial Accounts through to March this year.

Nearly 87% of all stock and mutual fund wealth is held by the top 10% of earners. Half of all households in the country own less than one percent, or around $590 billion.

According to Gallup polls, which Treasury Secretary Scott Bessent has referenced, about 38% of American households do not own any stocks.

This is a problem with market stability as well as wealth disparity.

When just 10% of households own 87% of the equity, the wealth effect of the market is extremely concentrated. Even after a 10% adjustment, only the wealthiest 10% of households would feel any change in their purchasing habits, leaving 87% of households unaffected.

In politics, there is an uneven level of tolerance for market losses.

Even while they are the main gainers from the rally, the top one percent will also be the main losers from the fall if it happens.

The political consequences, however, will affect everyone.

The Structural Breakdown

The wealth distribution in the United States is worse than in pre-revolutionary France.

That is an assertion of historical truth, not an embellishment to the rhetoric.

You can't have a normal market cycle when you have unprecedented levels of wealth disparity, record levels of borrowing, dollar debasement, and earnings concentration driven by artificial intelligence in just one business.

We are witnessing a system that fundamentally dismantles the connection between cost and worth.

The market was already highly leveraged before the Fed reduced rates.

When corporate executives sell into a market, hedge funds go short.

Even while the institutions with the greatest grasp of the numbers are covertly decreasing their investment, retail investors are flooding the AI stock market.

Leverage denominated in dollars is at record highs, but the dollar itself is falling in value.

The underlying weakness is being concealed by earnings season.

The speed of this unwind will be unprecedented, though, as margin calls begin to cascade, shorts begin to cover, and the AI miracle story begins to fall apart.

Not because the economy is utterly collapsed. Due to the fact that the framework is defective.

No shock has ever come at a time when everyone is expecting it, and the system is more susceptible than it has ever been.