The stock market has been riding a wave of exuberance in recent months, brushing aside geopolitical and economic risks. But the high may be getting too intense, Deutsche Bank analysts warned in a Thursday note.<\/p>\n
Spikes in margin debt \u2014 the money investors borrow from brokers to buy stocks \u2014 are flashing warning signs eerily reminiscent of late 1999 and mid-2007, just before the dot-com crash<\/a> and the global financial crisis.<\/p>\n From April to June, New York Stock Exchange margin debt jumped 18.5%, marking the fifth-fastest increase since 1998. That puts it in the company of past euphoric episodes that ended in sharp market downturns.<\/p>\n In June, investors borrowed a record high of just over $1 trillion from stock brokerages, according to the Financial Industry Regulatory Authority.<\/p>\n They warned that the rate of increase in margin debt \u2014 a measure of investor sentiment and risk appetite \u2014 has now started to look “too hot” by their metric, which poses a risk to credit performance.<\/p>\n “While there is still room for market euphoria to potentially grow, we are ultimately getting closer to that point where market euphoria is becoming too hot to handle,” they added.<\/p>\n Though the rate of margin debt growth still lags the peaks seen during the tech bubble and the pre-financial crisis rally, the starting level is already elevated. As a share of GDP, margin debt is now higher than during the dot-com bubble, and near its all-time high reached in 2021, according to Deutsche’s analysis.<\/p>\n That suggests there may be limited room for additional upside before the market overheats.<\/p>\n “The current rally we are experiencing is ‘different’ and ‘hotter’ than the many rallies we have experienced in 2023 and 2024,” the Deutsche analysts wrote.<\/p>\n They added that unexpected developments, including lower US import tariffs<\/a> on trading partners and a dovish Federal Reserve, could release more “animal spirits” into the market over the next three to six months.<\/p>\n However, the broader theme is that “the level and pace of margin debt growth today suggests market sentiment is starting to run too hot.”<\/p>\n Deutsche Bank’s caution comes as analysts across Wall Street<\/a> try to make sense of the current bull market, which has persisted despite risks ranging from inflation and trade tensions to global political uncertainty.<\/p>\n