Margin debt is at a record high. Here's what that means for the stock market.

By Mark Hulbert

Investors buying stocks with borrowed money suggests confidence that the market will keep rising. If only that were true.

Margin debt's recent jump to a new high is potentially worrying. But it's not clear just how much.

Margin debt reflects how much investors have borrowed from their brokers to purchase more stocks. It enables investors to leverage their gains, but at the risk of magnifying their losses. Finra this week reported that total margin debt in September rose for the fifth straight month, reaching a record $1.13 trillion.

Both bulls and bears claim that the recent growth in margin debt supports their outlooks. The bulls argue that, since margin magnifies losses when the market declines, rising margin levels indicate increasing confidence that the market will keep rising. At the same time, the bears argue that it's a sign of potentially irrational exuberance when margin debt increases for many months in a row.

The chart above illustrates how these contrasting dynamics balance each other out in practice. It plots the trailing 12-month percentage change in total margin debt along with the S&P 500's SPX trailing 12-month total return. Notice that the two series closely follow each other: The r-squared of the correlation of the two is a statistically significant 64.6%.

Another way of putting this statistical result is that margin debt is an excellent coincident indicator of the stock market. But that doesn't help us navigate the market. Only a good leading indicator does that. And that's where the margin indicator falls flat.

Consider the correlation between margin debt's trailing 12-month percentage change and the S&P 500's total return over the subsequent 12 months. Now the r-squared is an insignificant 2.6%. In other words, margin debt's trailing 12-month return explains or predicts just 2.6% of the stock market's subsequent 12-month return.

Margin debt's acceleration

One footnote to this discussion: There is limited evidence that a market top may be forming whenever margin debt grows significantly faster than the S&P 500. This is the case currently, since over the past 12 months (through September), margin debt grew 38.5% - more than double the S&P 500's 17.6% total return.

Notice from the chart that the prior occasions when the margin debt's growth rate (the red line) was significantly greater than the S&P 500's (the green line). Two instances stand out: At the top of the internet bubble and before the financial crisis of 2008-09.

Those are ominous parallels. But because they constitute just two data points, they can't provide robust statistical support for the bears' belief that it's a bad sign when margin debt grows significantly faster than the stock market.

The bottom line: But for the possible exception of when margin grows far faster than the market, the margin debt indicator tells you little about the stock market's likely trend over the next 12 months.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: This is a bad sign for the stock market

Also read: These low-risk stocks could be a profitable answer to this volatile earnings season

-Mark Hulbert

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

10-24-25 1220ET