“When the next crash hits, this will be the sign” — Advisor sounds alarm as leveraged ETFs hit record highs
As analysts debate the merits of the stock market’s bull run, wealth adviser Kurt S. Altrichter points to one indicator that suggests excess risk-taking and late-cycle behavior, warning that the market may be nearing a major turning point.
Altrichter was referring to the surge in leveraged equity ETFs, which use derivatives and borrowing to amplify daily stock-market moves.
Examples include the Direxion Daily NVDA Bull 2X Shares (NVDU), which delivers twice the daily performance of Nvidia’s stock, and the ProShares UltraPro S&P 500 (UPRO), which targets three times the daily return of the S&P 500 Index.
By October, the number of leveraged equity ETFs had climbed to 701, a new record high. The total has more than doubled since the pandemic, reflecting a dramatic rise in demand for amplified exposure to stocks.
“When the next major crash hits, there will be signs, and this is one of them,” Altrichter wrote, referring to the rise in leveraged ETFs. “When leverage becomes a product, not a tool, it tells you where we are in the cycle.”
This expansion signals a market dominated by speculation rather than fundamentals. Investors who trade on leverage tend to chase momentum and short-term gains, reflecting confidence, complacency, and a belief that markets only move higher, which are classic traits of end-of-cycle euphoria.
The broader market behavior reinforces that message. The S&P 500 Index has surged more than 32% from its April lows, fueled by optimism over trade deals, artificial intelligence, and expectations of imminent Federal Reserve rate cuts.
While it’s impossible to call the exact top, valuation risks are building, especially among mega-cap tech stocks that have powered most of the market’s gains.
Valuation risks remain a concern
The stock market’s historic rally has been increasingly driven by Big Tech, with U.S. technology companies now accounting for roughly 38% of total U.S. stock market capitalization, according to Datastream and Goldman Sachs data.
By several measures, tech valuations appear stretched. Elevated price-to-earnings (P/E) ratios, market concentration, and dominance by a handful of companies suggest that U.S. tech stocks may be priced for perfection.
According to a recent analysis by the Center for Economic and Policy Research (CEPR), much of the risk stems from the lofty growth expectations embedded in current valuations.
The Magnificent Seven — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla — are priced on the assumption that their AI and cloud-driven growth trajectories will continue unabated. If those assumptions falter, the sector could face a sharp revaluation, CEPR said.
However, valuation pressures aren’t limited to tech. Jonathan Glub, managing director at Seaport Research Partners, told Bloomberg that speculative excess is now spilling into other sectors.
“Where is the speculation? The speculation is not in the tech stuff, it’s in the non-tech stuff,” he said.
Even outside Big Tech, valuations are elevated. The S&P 500 is trading at more than 27 times forward earnings, which is a level typically seen only near major market peaks.