Traders work on the floor of the New York Stock Exchange (NYSE) in New York City.
Gina Moon | Reuters
The pace at which investors are borrowing money to invest in stocks has slowed significantly, raising concerns that the stock market will fall.
Annual growth in margin debt fell to 31.4% in September from 53.7% in May, according to recent FINRA data, Bank of America technical strategist Paul Sciana said in a note Friday. Siana warned that the slowdown in borrowing momentum from extreme levels is related to past market peaks.
May’s growth rate in 2026 was the fourth highest since 1998, according to BofA’s analysis. The three extreme periods occurred in 2000, 2007, and 2021. All of this preceded the stock market decline.
Earlier this year, borrowings were increasing faster than the rise in stock prices. Analysts view high borrowing levels as a contrarian signal, similar to any bullish sentiment indicator.
Margin debt in September was $1.48 trillion, 1.5% below June’s record high of $1.5 trillion.
High leverage can have a snowballing effect during market downturns. Lower prices lead to demands for additional collateral and forced sales, accelerating the economic downturn.
Individual investors could be hit hard. tesla For example, investor Hai Lu refinanced his home and raised $30,000 to pay off his margin debt during the 2022 stock market decline.
BofA sees other warning signs in the market, including widening high-yield credit spreads and a shift toward defensive sectors such as health care and consumer staples.
Paradoxically, the rotation into these sectors is pushing them to “bubble risk levels,” BofA’s equity derivatives team said in a note Tuesday. Similar changes occurred during the dot-com era of the late 1990s and during coronavirus gatherings, they added. “These developments provide further evidence that the market continues to move toward more bubble-like conditions.”
If bullish, Sciana noted that the midterm elections could ease some of the market uncertainty and trigger a bailout rebound. “Risk assets such as the S&P 500 typically rebound after interim results unless more serious downside risks materialize.”
