Margin debt is reaching levels only seen at previous market peaks. Margin liabilities have increased by more than 40% in the past 12 months, a threshold seen during previous market peaks in 2000, 2007 and 2021, according to Leuthold Group data. Margin debt (money that investors borrow from brokers to buy stocks against existing securities) increases purchasing power and potential profits, but it can also magnify losses. What’s particularly troubling right now is how quickly margin debt is increasing relative to the S&P 500’s returns. In other words, people are borrowing money much faster than stock prices are rising. Debt Outperforms S&P 500 Over the past year, the S&P 500 has returned about 22%, including reinvested dividends, about half the rate of growth in margin debt. “Today’s 54% increase in absolute margin debt and the 26% increase in excess margin debt over the past 12 months are both above historical trigger points in our study,” Leutold wrote. Historically, “neither series takes much time to cross the threshold.” Once the animal spirits subside, margin debt will shrink and stock prices will come under downward pressure. If history is any guide, when margin debt growth is this high, S&P 500 returns have historically evaporated in a single year. Scott Opsal, chief investment officer at Leuthold Group, said margin day volatility reached the 40% mark several months ago and the market is “entering a traditionally scary time in the calendar.” “When people get too excited, too tolerant of risk, too greedy, things usually go the other way,” Osal told CNBC. “This is a very bearish view.” Margin debt ballooned to $1.4 trillion in May, the latest month available, according to Finra data. Osal said when borrowing slows, so does demand for stocks. “Both of these are going to lead to periods where the market isn’t that great going forward,” he said. “When people start doubling down on borrowed money, that’s a contrarian signal that’s very hard to beat.” Attracting Margin Players The artificial intelligence trading underpinning the latest multi-year bull market is likely to draw more margin players into the market, Osal added. One sign of this is seen in the boom in more speculative leveraged ETFs. In two months last spring, these funds nearly doubled their assets, demonstrating a willingness to take on more risk. If so, margin calls, as brokers require investors to deposit more money into their accounts or face forced liquidations, would also accelerate downdrafts. “Once cracks begin to appear in data center expansion stocks, it could force other stocks to crack, and then margin calls will hit investors as a whole,” the investment manager said. “Concentration of profits and concentration of purchasing power is part of the problem.” — CNBC’s Deena Zaidi contributed to this report.
