Equity Funding: A Macro Variable

Research evidence excerpt

Equity Funding: A Macro Variable

Foundation

July 24, 2026 09:44 AM GMT

Morgan Stanley & Co. LLCMUS Rates Strategy | North America Martin W Tobias, CFA

Strategist

Equity Funding: A Macro Martin.Tobias@morganstanley.comMatthew Hornbach +1 212 761-6076

Matthew.Hornbach@morganstanley.com +1 212 761-1837

Variable Eli P Carter

Eli.Carter@morganstanley.com +1 212 761-4703

Equity indices suggest financial conditions are easy, but the Aryaman Singh

financing microstructure underneath them shows leveraged StrategistAryaman@morganstanley.com +1 212 761-1993

exposure is growing. We think equity funding has become an

important macro variable and introduce a demand-supply-price

framework to understand this micro-to-macro transmission.

Key Takeaways

Equity derivative notional exposure has eclipsed $9tr, and its rapid pace of

growth underscores rising investor demand for dealer-intermediated activity.

Balance sheet capacity is the binding constraint for equity financing when

demand for leverage outpaces the system's natural rate of capital creation.

AXW futures have similar economic exposure as OTC equity total return swaps;

they offer a more transparent gauge of the marginal cost of equity balance sheet.

Higher funding costs raise the hurdle rate on levered longs; AXW futures above

3σ vs. T12m range historically has preceded mean revision in SPX performance.

Investors need to heed how equity financing microstructure can become a source

of tighter macro FCI, when the marginal buyer is one reliant on leverage.

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