3 reasons the stock market could be overheating this summer
Despite constant speculation of turbulence ahead, major indexes have demonstrated an unshakeable ability to push past the noise and reach record highs.
For investors, the summer stock market rally is a relief after months of tariff-fueled uncertainty. But it's also raising one uncomfortable question: Is the market getting ahead of itself?
"One of the fastest sell-offs thanks to Liberation Day then one of the fastest rebounds," stated Jay Woods, chief global strategist of Freedom Capital Markets. "That rally back wasn't an overheated market, it was a recovery."
In the months since the April sell-off and recovery, though, other market experts have raised concerns that stocks are showing signs of overheating. As Tom Bruni, editor-in-chief and VP of community at Stocktwits, said recently, the market has been flashing signs of tougher days ahead.
Here are three signals market pros are watching to know how much steam the current rally has left.
The market's reaction to tariffs
Tariffs have been a key input for investors all summer, but the reaction to positive updates has been relatively tepid compared to the volatile swings seen a few months ago.
The market moves in reaction to Trump's deals with Japan and the European Union were tiny, but indexes eked out record highs after the news.
However, Dean Smith, chief strategist of FolioBeyond, warns that the market isn't out of the woods when it comes to the trade war.
"The trade deals that are being announced are being viewed by many with some relief since 'it could have been worse,'" he told Business Insider. "I contend it will get worse for the real economy, both because deals fall apart, or the agreed-upon tariffs actually start to have an adverse impact."
Smith added that it can take longer for supply shocks to cause real economic damage than people expect, but others also say the tepid response is itself a sign that markets are feeling fatigued after the latest rally to all-time highs.
"News is not what's important; it's the market's reaction to the news that tells the real story. And right now, investors are saying that the recent 'good news' isn't good enough to keep prices moving higher after a record rally off the Liberation Day lows," Bruni said.
Margin debt is rising
Smith also pointed to record levels of margin debt among investors. The trend of investors borrowing money to buy stocks is often considered a sign of an over-extended market rally or a speculative bubble.
According to data from Finra, margin debt has topped $1 trillion, an increase of 9.4% in the last month, and a jump of 25% in the last year.
"Much of the new credit is to younger investors with fewer reserves," Smith said. "Any sort of hiccup could trigger a wave of selling due to margin calls. Leverage amplifies moves in both directions."
This is likely partially fueled by the recent meme stock rally, which already seems to be running out of steam. Stocks like Opendoor, Krispy Kreme and Rocket Companies, which surged last week on retail-driven momentum, are already back in the red.
"The broader meme stock rally will only be sustained if the market can maintain sideways trading or upward momentum," he stated. "If the broader equity and cryptocurrency markets begin to decline, it will be a significant headwind for meme stocks that thrive on risk-taking and retail speculation."
The AI factor
The artificial intelligence boom may have helped fuel the market rally in recent years, but Smith said that he sees it as an "uncontrolled experiment" that has the power to upend recent market momentum.
"The role of fundamental investors in the market is rapidly declining in favor of fully automated quantitative strategies. AI is pushing that envelope, and is doing so with lightning speed, and zero regulatory guardrails."
As Business Insider reported, quantitative hedge funds have indeed been struggling since June 2025 and are struggling to find answers. This growing reliance on AI is a pressing concern for Smith.
"No one truly knows how these AI models will work in an environment of financial stress," he stated. "And no one knows what could set them off."
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