Is U.S. Exceptionalism Still Alive? A Look at Gross Leverage and Market Divergence

In the ever-evolving world of global finance, two themes have resurfaced with renewed intensity: the persistence of high gross leverage and the ongoing divergence between U.S. and European equities. Let’s break down what the latest data is telling us — and why it matters for investors, traders, and macro observers alike.

Gross Leverage Remains High: What Does It Mean?

A recent snapshot from Goldman Sachs Prime Brokerage reveals that gross leverage across hedge funds remains elevated. But before we dive into the implications, let’s clarify what “gross leverage” actually means.

Gross leverage refers to the total amount of capital deployed (long and short positions combined) relative to the fund’s equity. It measures how much exposure a hedge fund is taking, regardless of the directional bet. For example, a hedge fund with $100 million in equity and $300 million in total positions would have 3x gross leverage.

When gross leverage is high, it suggests that funds are very active — potentially aggressively pursuing market opportunities on both sides of the trade (long and short). This is not necessarily a sign of bullishness or bearishness; it’s more about the level of engagement and risk-taking.

So, why does it matter that gross leverage is still high?

Risk Appetite Remains Elevated: Hedge funds are clearly not sitting on the sidelines. This level of exposure indicates that institutions are deploying capital heavily, possibly due to conviction in directional trends — or even in market-neutral strategies — that they believe will outperform.
Fragility and Volatility Risk: High gross leverage can become a double-edged sword. In times of market stress or sharp reversals, funds may be forced to unwind positions quickly, amplifying volatility.
Potential Crowding: Elevated leverage can also hint at crowded trades — multiple players piling into similar positions. If one leg of the trade falters, it could trigger a broader, more disruptive unwind.

In short, high gross leverage is a sign of confidence — or at least ambition — but it also increases systemic risk.

NASDAQ vs. SX5E: U.S. Outperformance Back From the Dead?

The second chart tells an equally interesting story. It shows the ratio of the NASDAQ Composite Index (a tech-heavy U.S. benchmark) to the Euro Stoxx 50 (SX5E), the premier blue-chip index for the Eurozone.

For much of 2023, the narrative of “U.S. exceptionalism” had cooled. Europe, driven by cyclical tailwinds, strong bank performance, and easing energy fears, began to attract investor attention. Many believed the outperformance of U.S. tech stocks was behind us. But the recent data challenges that notion.

The chart reveals that the NASDAQ/SX5E ratio is climbing steadily again, suggesting U.S. tech — and by extension, U.S. equities — are once again outperforming their European peers. Here’s why that matters:

Tech Leadership Resurgent: The NASDAQ’s strength indicates that mega-cap tech and AI-related names continue to attract capital. These companies benefit from high margins, secular growth trends, and — crucially — dominance in emerging technologies like artificial intelligence and cloud computing.
Rate Sensitivity: U.S. tech stocks are sensitive to interest rate expectations. As the Federal Reserve pivots toward a more dovish stance or as inflation stabilizes, these growth names tend to rally. Europe, by contrast, is more value/cyclically tilted — and less responsive to the tech cycle.
Macro Stability: Despite concerns about U.S. fiscal deficits and political noise, the structural advantages of the U.S. economy — deep capital markets, a robust consumer, and innovative corporate sector — continue to lure global capital.

In essence, the rising NASDAQ/SX5E ratio signals a revival in belief in the U.S. equity premium. It’s a reaffirmation that, despite global diversification narratives, when tech runs, America leads.

A Two-Fold Narrative

Together, these two charts paint a compelling picture:

Risk is on: Hedge funds are still highly leveraged, signaling aggressive positioning and belief in market opportunities.
The U.S. is back on top: Despite talk of a more multipolar investing world, capital is again flowing into U.S. assets — especially tech.

But these dynamics come with caveats. High leverage increases fragility, and U.S. outperformance can become self-reinforcing until it doesn’t — that is, until valuations reset or macro conditions shift abruptly.

For now, though, the data doesn’t lie: the U.S. narrative isn’t dead. If anything, it’s gaining strength — and it’s doing so under leveraged conditions.

IBAFIN