Earlier this month, Wall Street’s bull market celebrated its fourth anniversary. The artificial intelligence (AI) infrastructure build-out has been instrumental in lifting the Dow Jones Industrial Average (DJINDICES:^DJI), S&P 500 (SNPINDEX:^GSPC), and Nasdaq Composite (NASDAQINDEX:^IXIC) to several record highs in 2026.
From a historical standpoint, game-changing technological innovations, while moneymakers over the long term, don’t have the best track record early on. Every major tech innovation since (and including) the advent of the internet in the mid-1990s has navigated an eventual bubble-bursting event.
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However, a potential AI bubble may not be Wall Street’s biggest worry. There’s another far bigger bubble that appears ready to burst, and it foreshadows significant downside for stocks if it happens.
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History says the stock market’s risk-taking bubble is about to pop
Though the Dow, S&P 500, and Nasdaq Composite have, thus far, successfully climbed the wall of worry, Wall Street’s risk-taking bubble may be on the verge of popping. I’m talking about outstanding margin debt.
Margin represents money investors have borrowed from their broker, with interest, to short-sell (wager against) or purchase securities. When margin is used to buy stocks or exchange-traded funds, it acts as leverage.
If a security moves in the desired direction, using margin can magnify an investor’s gains. However, if a security moves in the opposite direction to what’s desired, margin can quickly amplify losses. This dynamic is what makes using margin so risky. It also explains why outstanding margin debt represents a crude measure of investors’ willingness to take risks.
In June, outstanding margin debt, as reported by FINRA, reached an all-time high of $1.502 trillion. Though it dipped to $1.417 trillion the following month, margin debt jumped back to $1.48 trillion in September.
Outstanding margin debt rising over multiple decades is perfectly normal. But when it goes parabolic over a short time frame, history consistently shows that things break on Wall Street.
Since 1998, there have been four instances, including the present, in which margin debt has soared by at least 65% over a relatively short time frame, and the previous three occurrences were all followed by mammoth stock market declines:
