Wealth advisors tracking investor behavior have a new data point to monitor: margin debt has surged to a record high, signaling investor sentiment may be approaching unsustainable levels.
According to the latest FINRA data, outstanding margin debt hit $1.01 trillion in June, eclipsing the previous record of $937 billion set in February. The rapid climb—an 18% jump in just two months—raises red flags reminiscent of the late-1990s tech bubble and the pandemic-era retail trading boom.
The surge in leveraged positions comes on the heels of a volatile second quarter. Markets recoiled in April following former President Trump’s announcement of sweeping tariffs, but risk sentiment rebounded quickly in May and June as investors piled back into equities—this time with borrowed capital.
Historically, elevated margin balances tend to track broad equity gains. The S&P 500 and Nasdaq have both rallied since April, and the parallel rise in margin suggests investors are leaning into the rally with conviction. But the scale and speed of this buildup has strategists warning that risk appetites may be overheating.
The current margin levels surpass those seen during the meme stock craze in 2021, when first-time investors rushed into speculative trades using zero-commission platforms like Robinhood. This time, the increase appears to be more broadly distributed, encompassing institutional as well as retail accounts.
Deutsche Bank Flags Bubble Risk
Deutsche Bank strategists are urging caution. In a research note dated July 24, a team led by credit analyst Steve Caprio likened the recent rise to the speculative surges of past bubbles. The 18% two-month increase in margin debt is among the fastest ever recorded—just behind the 24.6% spike in December 1999 and the 20.3% rise in May 2007.
Caprio’s team believes this growth in margin debt is an effective early-warning system for market sentiment extremes. “We care about margin debt, as it is a useful gauge of when market sentiment is on the verge of going from ‘red-hot’ to ‘white-hot,’” the note states. “While there is still room for market euphoria to expand, we’re closing in on levels that historically precede corrections.”
For wealth advisors managing client portfolios, that warning may merit strategic recalibration. Caprio notes that the current pace of margin growth aligns with historical periods that preceded wider credit spreads in U.S. high-yield bonds—typically a leading indicator of shifting risk appetite across asset classes. His team projects spreads could widen by 80 to 120 basis points over the next 12 months, which would translate to relative underperformance of high-yield debt compared to Treasuries.
Watch for Sentiment Shifts
Whether this euphoria persists—or reverses—depends in part on policy shifts and macroeconomic developments. Caprio allows for potential curveballs, such as a Fed pivot or tariff rollback, that could keep risk assets buoyant longer than fundamentals might suggest. But even under those scenarios, he urges advisors not to lose sight of the bigger picture: “The level and pace of margin debt growth today suggests market sentiment is starting to run too hot.”
For advisors, these conditions present both risks and opportunities. Elevated margin debt levels can fuel continued gains in a bull market, but they also set the stage for amplified downside if sentiment shifts abruptly. Advisors may want to stress-test client portfolios against scenarios where volatility spikes, liquidity thins, or credit spreads widen.
What It Means for Client Conversations
The data offers a clear signal for advisors to reengage clients around leverage, risk tolerance, and market expectations. In many cases, clients may be unaware of the broader implications of rising margin usage, especially if their exposure to equities is through passive vehicles that benefit from momentum.
More aggressive clients may be tempted to increase leverage or chase performance late in the cycle. Advisors have an important role to play in contextualizing today’s market enthusiasm and helping clients avoid emotional decision-making fueled by fear of missing out.
At a time when equity indices are setting new highs and credit markets remain relatively calm, the temptation to lean in is understandable. But if margin debt continues its current trajectory, advisors should be prepared to rebalance portfolios, trim exposure to highly volatile sectors, and raise liquidity if needed.
The Bottom Line
The $1 trillion milestone in margin debt isn’t just a headline—it’s a temperature gauge on market sentiment. For RIAs and wealth managers, it’s a prompt to revisit asset allocation, reinforce investment discipline with clients, and prepare for possible shifts in market dynamics. Leverage can be a powerful tool in rising markets, but it also accelerates losses when the tide turns. With sentiment approaching “white hot,” advisors should be thinking a step ahead.
