Margin debt. What is it? Technically, it’s the total amount of money owed to brokerage firms by customers who’ve borrowed funds to buy financial securities. But in simple terms, it’s just money investors borrow to buy stocks.
Why would someone do this? Because of leverage. It can amplify your returns. Let’s say you have $10,000 but want to invest more. You can borrow another $10,000 from your brokerage to buy $20,000 worth of stocks—doubling your exposure and, potentially, your gains.
Of course, this is risky. It can boost your gains if the market goes up. But if stocks fall, losses pile up fast—and you still have to pay back the loan. So when margin debt across the market rises a lot, it’s often a sign that investors are feeling very confident, maybe even overly confident.
That’s where this week’s indicator comes into play, shown above. On the top clip, we have the Dow Jones Industrial Average (the stock market). In the middle clip, we have total margin debt (orange line) along with 42-month standard deviation bands, to determine a range. On the bottom clip, we calculate the Z-score, which is just fancy statistical measure for how far above or below the norm margin debt has become.
How does it work? Well, historically, when margin debt is more than 1.8 standard deviations above the average, future returns have been mediocre. Especially compared to returns when margin debt has been well below average (more than 0.8 standard deviations below), where returns are much higher.
To put it differently, this indicator says that when margin debt is high and investor confidence is extremely optimistic, future market returns tend to go down. And by contrast, when margin debt is low and investor confidence is extremely pessimistic, future market returns tend to be higher.
That makes sense. So what is it saying now? Well, that’s where the concern comes in. As of June 2025, the Z-score is 2.46—well into “excessive optimism” territory. In the past 60 years, this has usually only happened near market tops.
So, the bottom line is that extreme margin debt levels have a history of signaling trouble before they show up in prices. While it’s not a timing tool on its own, this kind of speculative excess has often preceded weaker returns.
That’s a good reason to stay alert, manage risk carefully, and make sure your portfolio isn’t leaning too far into the hype.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks.