Buying Stocks With Borrowed Money Hits Levels Last Seen Before Major Market Crashes, Raising New Warning Signs

Investors are once again piling into the stock market with borrowed money at a pace that has historically preceded some of Wall Street's biggest downturns, according to new research, raising concerns that the current bull market may be entering a more vulnerable phase.

Margin debt, the money investors borrow from brokerage firms to purchase stocks using existing investments as collateral, has surged more than 40% over the past 12 months. That rate of growth has only been seen ahead of previous market peaks in 2000, 2007 and 2021, periods that were followed by significant corrections or bear markets, CNBC reported, citing data from Leuthold Group.

While margin borrowing can amplify gains during rising markets, it also magnifies losses when stocks fall. If prices decline sharply, investors using leverage may be forced to sell assets to meet margin calls, accelerating market losses.

The latest figures show that margin debt has climbed to approximately $1.4 trillion as of May, according to data from the Financial Industry Regulatory Authority (FINRA). The amount represents one of the highest levels on record and reflects growing investor confidence amid the ongoing rally fueled largely by artificial intelligence-related stocks.

Leuthold analysts argue that the pace of borrowing is even more concerning than the headline figure itself. Over the past year, the S&P 500 has delivered a total return of roughly 22%, including reinvested dividends. During the same period, margin debt expanded by approximately 54%, far outpacing the market's gains.

That disconnect suggests investors are increasing leverage much faster than the value of their portfolios is growing. "Today's 54% absolute margin debt growth, and 26% excess margin debt growth over the last 12 months both exceed the historical trigger points in our study," Leuthold wrote in its research.

Historically, the firm noted, margin debt rarely remains above those thresholds for long. Once investor enthusiasm fades, borrowing typically contracts, reducing demand for stocks and placing downward pressure on prices.

Scott Opsal, chief investment officer at Leuthold Group, told CNBC that the historical pattern is difficult to ignore. "When people get too enthusiastic, too tolerant of risk, too greedy, things usually roll the other direction," Opsal said. "This is very bearish looking."

According to Leuthold's historical analysis, S&P 500 returns have frequently disappeared over the following 12 months whenever margin debt growth reached similar levels. The current surge in leverage appears closely tied to investor enthusiasm surrounding artificial intelligence, which has driven much of the stock market's gains over the past several years.

Technology companies involved in AI infrastructure, semiconductor manufacturing, and data center expansion have attracted enormous inflows from both institutional and retail investors.

Opsal believes that excitement has also fueled increased demand for speculative investment products, particularly leveraged exchange-traded funds, or ETFs. Assets invested in leveraged ETFs nearly doubled during two months last spring, reflecting a growing willingness among investors to amplify their exposure to market gains through borrowed capital.

That combination of concentrated market leadership and increased leverage could become problematic if sentiment shifts. Should leading AI-related stocks begin to weaken, leveraged investors could face margin calls requiring them to either deposit additional cash or sell securities.

Forced liquidations often create a domino effect, putting additional pressure on prices as more investors are compelled to sell. "Once a data center buildout stock starts to crack, that could force others to crack, and then the margin calls will hit that whole silo of investors," Opsal said. "The concentration of gains and the concentration of buying power is part of the story."