Margin debt is reaching levels seen only at past market tops. According to data from Leuthold Group, margin debt has grown by more than 40% over the past 12 months, a threshold seen at prior market peaks in 2000, 2007 and 2021. Margin debt — money investors borrow from brokers to buy stocks, using existing securities as collateral —amplifies buying power and potential gains, but can also magnify losses. What’s especially troubling now is how fast margin debt has grown relative to S & P 500 returns. Put another way, people are borrowing money at a much faster pace than stocks are rising. Debt outpaces S & P 500 The S & P 500 has returned about 22% over the past year, including reinvested dividends, only about half as fast as the rate of growth in margin debt. “Today’s 54% absolute margin debt growth, and 26% excess margin debt growth over the last 12 months both exceed the historical trigger points in our study,” Leuthold wrote. Historically, “neither series spends much time above the threshold.” Once animal spirits subside, margin debt shrinks and stock prices are pressured downward. If history is any guide, returns in the S & P 500 have historically evaporated over a one-year time horizon when margin debt growth has been this high. With the rate of change in margin date having hit the 40% threshold months ago, the market is “heading into the traditionally scary part of the calendar,” said Scott Opsal, Leuthold Group’s chief investment officer. “When people get too enthusiastic, too tolerant of risk, too greedy, things usually roll the other direction,” Opsal told CNBC. “This is very bearish looking.” Margin debt ballooned to $1.4 trillion in May, the most recent month available, according to data from Finra . When borrowing slows, so does the demand for stocks, Opsal said. “Those are both things that then set up the market for not so good times down the road,” he said. “When people start doubling down with borrowed money, that’s a contrarian sign that’s really hard to beat.” Attracting margin players With the artificial intelligence trade underpinning the latest multi-year bull run, it’s likely drawn a lot of margin players into the market, Opsal added. One sign of that is found in the boom for more speculative, leveraged ETFs. In two months last spring, assets in those funds nearly doubled , underscoring a willingness to take on more risk. If that’s the case, margin calls – when a broker demands an investor deposit more money into their account or face forced liquidation – would also accelerate any downdraft. “Once a data center buildout stock starts to crack, that could force others to crack, and then the margin calls will hit that whole silo of investors,” the investment chief said. “The concentration of gains and the concentration of buying power is part of the story.” — CNBC’s Deena Zaidi contributed to this report.
