Leveraging up
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Investors are using a record amount of borrowed money to bet on stocks.
Why it matters: Trading with borrowed money — known on Wall Street as "margin" — can amplify both returns on the way up and losses if the market turns.
- Even investors who do not trade on margin should watch it: Borrowed money has played a key role in market crashes, from 1929 to the dot-com bust.
State of play: Through the end of April, net margin debt hit more than 1.25% of U.S. market cap, near the highest level in records stretching back to 1997.
Big picture: It's just one of the metrics causing some to question the sustainability of the market's AI-driven boom. Others include:
- Long-term measures of market valuation like Yale professor — and Nobel laureate — Robert Shiller's Cyclically Adjusted Price-to-Earnings ratio (CAPE) are at highs not seen since just before the dot-com crash.
- The market's valuation as a share of U.S. GDP — sometimes known as the Buffett Indicator because Warren Buffett often cited it — is the highest on record.
- As we mentioned Wednesday, the stock market seems to be offering skimpy returns compared with bonds, a state of affairs that's sometimes signaled poor returns to come.
- And speculative trading activity seems to be picking up, with bullish trading of options (as measured by put-call ratios) and leveraged ETFs gathering momentum.
What they're saying: "Whether we're in a bubble is a very common question from investors and there are a number of ways to address that," said Ben Snider, Goldman Sachs' chief U.S. equity strategist.
- He added: "I think it's fair to say the increase in leveraged retail trading activity does point in the direction of signals that would warrant some caution."
Yes, but: As compelling as these measures of market exuberance may seem, their record as timing mechanisms — that is, as guides for when to buy and sell — is pretty terrible.
- Shiller's CAPE ratio, for example, has signaled market overvaluation for almost all of the last decade.
- Anyone who sold when it broke out of its previous range in late 2016 would have missed out on an over 200% rise in the S&P 500.
Case in point: Goldman Sachs' Snider doesn't find the current levels of market enthusiasm off-putting.
- On Wednesday, he raised his year-end S&P 500 target to 8,000 (it was previously 7,600), implying a gain of 16.9% in 2026. He cited the strength of corporate earnings, wrinkles and all, as a reason for continued optimism.
The bottom line: Stocks are probably a bit frothy and could be due for a correction. But timing the markets is incredibly hard.
