Markets are partying like it's 1999 and 2007, but a hangover may be ahead, Deutsche says
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.
Spikes in margin debt — the money investors borrow from brokers to buy stocks — are flashing warning signs eerily reminiscent of late 1999 and mid-2007, just before the dot-com crash and the global financial crisis.
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.
In June, investors borrowed a record high of just over $1 trillion from stock brokerages, according to the Financial Industry Regulatory Authority.
They warned that the rate of increase in margin debt — a measure of investor sentiment and risk appetite — has now started to look "too hot" by their metric, which poses a risk to credit performance.
"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.
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.
That suggests there may be limited room for additional upside before the market overheats.
"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.
They added that unexpected developments, including lower US import tariffs on trading partners and a dovish Federal Reserve, could release more "animal spirits" into the market over the next three to six months.
However, the broader theme is that "the level and pace of margin debt growth today suggests market sentiment is starting to run too hot."
Deutsche Bank's caution comes as analysts across Wall Street try to make sense of the current bull market, which has persisted despite risks ranging from inflation and trade tensions to global political uncertainty.
The S&P 500 and the Nasdaq hit fresh record highs again on Thursday.
Jennifer Nash, an economic and market research analyst at financial data and analytics firm VettaFi, also examined the historical link between margin debt and market turning points.
In her Wednesday review of data since 1997, she observed a potential relationship between sharp rises in margin debt and subsequent peaks in equities, as well as troughs in margin debt aligning with market bottoms.
However, "there are too few peak-trough episodes in this overlay series to take the latest credit balance data as a leading indicator of a major selloff in US equities," she wrote.
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