Signs of a Late-Stage Rally in New York Stocks? AI-Driven Leverage Pushes Margin Debt to a Critical Level

[Financial News]  

Concerns are growing that New York stocks may have already peaked and be on the verge of entering a bear market. Heavy borrowing to invest is at the center of those worries.
CNBC reported on the 15th, local time, citing data from the Leuthold Group, that margin debt has surged more than 40% over the past year. That pace of increase matches the threshold seen when markets peaked in 2000, 2007, and 2021.

Margin debt is money investors borrow from securities firms to buy more stocks, using existing shares as collateral. It boosts buying power and can lift returns in rising markets, but it also magnifies losses when prices fall.
What is most alarming is the speed.
The increase in margin debt is far outpacing the rise in the S&P 500 Index's returns.
Over the past year, the S&P 500 Index has returned about 22%, including dividend reinvestment, but margin debt has surged 54%, more than twice that pace.
In other words, investors are borrowing money faster than stock prices are rising.

Leuthold warned that both the 54% absolute growth rate in margin debt and the 26% excess growth rate over the past year have exceeded the risk thresholds identified in previous research. It added that, historically, periods in which both indicators stayed above those thresholds were not long.
In the past, when margin debt growth reached such high levels, the S&P 500 Index gave back all of its prior gains over the following year. There were no exceptions.
Scott Wupsal, chief investment officer at Leuthold, warned that margin debt growth has exceeded the 40% threshold over the past several months, meaning the market is "entering a traditional fear zone."

Wupsal said, "When people become extremely excited, overly tolerant of risk, and greedy, markets usually turn in the opposite direction," adding that "if borrowing slows, demand for stocks will also weaken."
He emphasized that "both developments are signs of deteriorating market conditions" and that "the moment people start borrowing to increase their bets is a strong signal to sell."
Wupsal said the artificial intelligence (AI) theme, which has fueled the bull market of recent years, is likely to have triggered the borrowing frenzy, and noted that speculative leveraged exchange-traded funds (ETFs) are riding the boom.
If stock prices fall in such an environment, margin calls can follow, with brokers demanding additional collateral or forcing liquidation, which can accelerate the decline.

[email protected] Song Kyung-jae Reporter