You’re really reluctant to have to think about stock market price levels as much as you take for granted these days. It’s clear that AI plays are in a monster bubble, but that doesn’t mean they won’t reach greater heights before reality brings them back down to earth. As we have discussed, historically stock market crashes do not cause a crisis unless they are fueled by large amounts of debt, as in the case of a major crash, but they do damage the economy by causing investors to significantly cut back on spending and capital investment. This loss of demand can lead to a recession, leading to deflation and zombification. Therefore, a hangover can still cause a lot of harm.
Some market watchdog sites, including Wolf Richters, are sounding the alarm that U.S. margin debt is at an all-time high. Below is an excerpt of Wolf’s graph and his commentary.
Stock market leverage has risen sharply since April. In September, margin debt (the amount investors borrow from brokers) increased by another 6.3%, or $67 billion, from August to a record $1.13 trillion…
Additional leverage, or borrowed money flowing into the stock market, creates buying pressure and increases stock prices. Leverage is a big accelerator for going up, but it’s also a big accelerator for going down. Margin debt has skyrocketed over several months, bouncing from new highs to new highs, indicating excessive speculation and risk-taking, always leading to sharp declines.
The small problem is that, while the diagram above is accurate, we don’t know as much about stock market froth as we might think. Borrowing using stocks as collateral is strictly regulated. Therefore, if the market price increases significantly, you will take out margin borrowing. The chart above is another example of how quickly stocks rose, and how once the spell of exuberance wears off, forced deleveraging accelerates the decline.
Who rejoined from the decidedly mainstream Morningstar in August:
For some investors, margin debt is not a red flag.
One of the recently proposed explanations for the record rally in the US stock market was the equally record amount of margin debt incurred in the process. Borrowed funds for stock investments exceeded $1 trillion in August.
But for Aptus Capital’s Brian Jacobs, this isn’t a five-alarm call, and it’s not as ominous as investors might expect. Posted by economist David Rosenberg
Jacobs wrote in a recent investment blog: “It (margin) moves with the market. As stock prices rise, account values increase and investors naturally increase leverage. Is margin up 25% compared to last year? The S&P 500 SPX is up about the same amount. Has margin almost doubled over the past five years? The S&P 500 is up about the same amount.”
But that said, while a cursory look at margin borrowing levels may not do much more than show that stock prices have risen significantly and rapidly recently, other ways to analyze margin borrowings highlight a worrying picture. At the end of September, Proactive Capital’s Cory McPherson announced that “margin debt shows investors are all in.” Main sections:
From August [2025] According to the figures, margin debt to nominal GDP stands at 3.48%. The record high was 3.97% in October 2021. However, for historical context, this ratio peaked at 2.6% during the dot-com bubble in 2000, and 2.5% in 2007 before the Great Recession.
Another way to look at it is the margin debt carry load. These affect the interest paid on margin debt. The chart below shows the dollar amount of margin debt multiplied by the estimated margin rate. The margin rate is calculated as the bank’s maximum prime rate plus 2%. Convert this to % of nominal GDP. We now see it reaching levels seen in the final stages of the dot-com bubble era in 2000. That said, margin debt is by no means an indicator of timing. As with the stock market, this price is likely to continue to rise. But what it can do is cause a severe downturn in the market. If an investor holds a stock on margin and the stock falls by a certain amount, the brokerage firm will force the investor to sell, potentially creating an elevator-down effect similar to what happened in April of this year.
Stock market fundamental indicators have also reached extremely high levels recently. The price-to-sales ratio is a valuation metric that compares a company’s stock price and earnings. It’s basically a measure of how much investors are willing to pay for each dollar of a company’s sales. Looking at the S&P 500 price-to-sales ratio (S&P 500 market capitalization divided by the total sales of all S&P 500 companies over the past 12 months), we see that this ratio is above its peaks last year and 2021. It also far exceeds the peak of the dot-com bubble, which is considered one of, if not the largest, stock market bubble in history. Of course, a lot of that is being driven by technology stocks and the AI boom we’ve seen over the last few years. The stock price is significantly higher than current sales. Overvaluation does not cause market declines or bear markets, but they often precede them.
McPherson then considers some anomalies in the real economy data, that the large downward revision in employment occurred without a recession, and that while the Conference Board’s leading indicators have been falling for three years, the coincident indicators have continued to rise. It seems that running very large budget deficits for some time can have confusing consequences.
