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The pace at which investors are borrowing money to invest in stocks has cooled substantially, raising concern that the stock market may be due for a fall.
Recent FINRA data shows the annual growth in margin debt fell to 31.4% in September from 53.7% in May, Bank of America technical strategist Paul Ciana pointed out in a Friday note. Ciana warned that slowing borrowing momentum from extreme levels has been associated with previous market peaks.
May's growth rate in 2026 was the fourth highest since 1998, according to a BofA analysis. The three higher extremes took place in 2000, 2007 and 2021 — all of which preceded stock market declines.
Earlier this year, borrowing was increasing much faster than stocks were rising. Analysts view high borrowing levels as a contrarian signal, similar to bull-bear sentiment indicators.
At $1.48 trillion, margin debt in September is 1.5% below June's record of $1.5 trillion.
High leverage can have snowball effects in a market downturn. Lower prices trigger demands for additional collateral or forced sales, which accelerate a downturn.
Individual investors can be hit hard. Tesla investor Hy Luu, for example, refinanced his home to raise $30,000 to pay down margin debt during the stock's 2022 decline.
BofA sees other market warning signs, including widening high-yield credit spreads and a rotation toward defensive sectors like healthcare and consumer staples.
Paradoxically, the rotation into those sectors has pushed them to "bubble-risk levels," BofA's equity derivatives team said in a note on Tuesday. Similar shifts occurred in the late 1990s dot-com era and Covid rally, they added. "These dynamics provide further evidence that markets continue to move towards a more bubble-like state."
The bull case is that the midterms could alleviate some of the market's uncertainty and trigger a relief rally, Ciana noted. "Typically, risk assets such as the S&P 500 rebound after midterms unless more severe downside risks materialize."