Stocks have rallied in ​2026, pushing the Nasdaq Composite Index (.IXIC) to 20 record closes this year, as AI spending on chips and other goods drives surging profit growth while investors remain confident the U.S. economy can avoid a recession.

Stefano Pascale, head of U.S. equity derivatives strategy at Barclays, said higher financing costs reflect growing demand to participate in the market — a sign of confidence more than a cause for concern.

"The cost of financing going higher typically coincides a little bit with periods of euphoria," he said. "The ​cost of financing going higher is not, per se, a problem for the market."

The consequence, he added, falls mainly on trades that rely heavily on cheap financing, where rising financing costs may force some leveraged investors ​to pull back.

The euphoria is visible in flows. Assets in U.S.-domiciled leveraged exchange-traded products doubled in the last few months to around $200 billion, driven by technology and semiconductor-linked products.

Options demand has added another layer. Investors who had cut risk ‌during the recent Iran ⁠war rushed to buy upside exposure after a ceasefire, driving a surge in call-option activity that further strained dealer capacity.

Stock market gains themselves and rising equity issuance are also tightening capacity. Barclays estimates that if the equity financing market is around $10 trillion, then a 10% rise in equities can create roughly $1 trillion of additional financing demand, potentially adding $150 billion to $200 billion of risk-weighted assets — the capital banks must hold against those positions — for the banks that intermediate those trades.

BROADER FUNDING REMAINS ACCOMMODATIVE

The Treasury repo market has remained accommodative even as equity financing costs rise.

Samuel Earl, a U.S. rates strategist at Barclays, said changes this year to the Supplementary Leverage ​Ratio — a rule governing how much capital large banks ​must hold relative to their total assets — gave ⁠large U.S. banks more room to handle government bond trades. But equity financing is more capital-intensive, consumes more liquidity under bank rules, has stricter counterparty limits and lacks the central-clearing release valve that helps dealers net Treasury repo positions, he said.

Whether strong stock valuations can continue has consequences beyond markets.

Andy Constan, founder and chief ​investment officer at Damped Spring Advisors, said rising asset prices have become a critical support for U.S. consumption at a time when real wage growth ​is weak. "If the stock market ⁠just stays where it is, that influence disappears," he said.

LEVERAGE FOCUSED ON SEMICONDUCTORS

For Morgan Stanley, the risk lies not just in growing dependence on leverage that is becoming more scarce, but in the concentration of stocks underpinning the rally.

Indeed, only one of the 11 S&P 500 sectors has outperformed the broader index over the past three months: Information Technology, home to chip firms such as Nvidia (NVDA.O), Broadcom (AVGO.O) and recent favorite Micron (MU.O), whose shares have more than ⁠tripled this year. ​Within that sector, semiconductors and semiconductor equipment account for roughly half the weight.

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Morgan Stanley's Tobias said that peaks in stocks have ​coincided with highs in equity financing costs. With funding pressures rising into quarter-end and the S&P 500 (.SPX) struggling to break over its 7,621 high on June 2, the market could be facing an inflection point.

“What's propelling the market higher isn't a broader reflection of the ​outlook for the U.S. economy. It's simply leverage that's being concentrated in one very narrow part of the market,” said Tobias.