Wall Street’s Biggest Bubble Looks Ready to Burst, and I’m Not Talking About AI or Quantum Computing

Last month, Wall Street and investors celebrated the fourth anniversary of the current bull market. Both the reference S&P500 (SNPINDEX:^GSPC) and fueled by growth Nasdaq Composite (NASDAQINDEX:^IXIC) have more than doubled from their 2022 bear market lows, while the iconic Dow Jones Industrial Average (DJINDICES:^DJI) increased by 90%.

A confluence of factors has propelled Wall Street’s major stock indexes to new highs, none more significant than the evolution of artificial intelligence (AI) and the advent and early proliferation of quantum computing. Both of these opportunities represent trillions of dollars that investors simply don’t want to miss.

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But following the parabolic rise in the stock market, concerns are growing about a possible event bursting the AI ​​and/or quantum computing bubble. While history hasn’t exactly been kind to cutting-edge technology—every revolutionary technology has suffered an early-inning bubble burst event since the mid-1990s—there’s an even bigger bubble that appears ready to burst, from what history tells us.

This $1.5 trillion bubble could upend the stock market rally driven by AI and quantum computing.

While history shows that the AI ​​and quantum computing bubbles are expected to eventually burst, the $1.5 trillion unpaid margin debt bubble could be the spark that upends the four-year stock market rally.

“Margin” is the money an investor borrows from their broker, with interest, to bet (short sell) or buy securities. When margin is used to purchase stocks or exchange-traded funds (ETFs), it represents a form of leverage.

Using margin can be risky. If an investor’s stake moves in the desired direction, they can quickly amplify their gains. But if a stock or ETF moves in the opposite direction, losses can be quickly magnified. This dynamic makes outstanding margin debt a somewhat crude, but nonetheless intriguing, measure of investors’ willingness to take risk.

According to FINRA, outstanding margin debt reached a record high of $1.502 billion in June. Although margin debt is expected to increase steadily over time, keeping pace with the overall value of the stock market, bad things often happen when the amount investors borrow from their brokers increases significantly over a short period of time.

Over the course of about 30 years, there have been four instances where outstanding margin debt increased by at least 65% over a reasonably short period of time (12 to 19 months), including today. The previous three events all coincided with substantial bear markets:

• From March 1999 to March 2000: In the 12 months before the dot-com bubble officially burst, outstanding margin debt increased by 80% and nearly reached $300 billion. After the Internet frenzy subsided, the S&P 500 and the Nasdaq Composite lost 49% and 78% of their respective values ​​in October 2002.

• June 2006 to July 2007: Margin debt skyrocketed again in the 13 months immediately before the start of the financial crisis. Margin debt jumped 66% to more than $416 billion, according to FINRA. At the height of the financial crisis, the benchmark S&P 500 lost 57% of its value.

• March 2020 to October 2021: The third time we saw a rapid increase in margin debt was in the 19 months following the COVID-19 crash. Fiscal stimulus fueled investors’ willingness to take risks, swelling outstanding margin debt by 95% to a record of nearly $936 billion. Three months after that peak, the 2022 bear market took shape, ultimately wiping out a fifth, a quarter, and a third of the respective values ​​of the Dow, S&P 500, and Nasdaq.

• April 2025 to June 2026: During this 14-month period, the evolution of AI and the arrival of quantum computing caused margin debt to soar 77% to the aforementioned all-time high of $1.502 billion.

History clearly shows that taking outsized risks is the ultimate red flag on Wall Street. While margin debt can’t tell us when the music will stop or what catalysts might sink the stock market, it clearly shows the unsustainability of excessive risk-taking, which is doubly problematic in a historically expensive stock market.

Image source: Getty Images.

Patient Investors Can Thrive Even When Bubbles Burst

From a historical perspective, the near-term outlook for the AI ​​and quantum computing-driven Wall Street rally is not rosy. If history rhymes again, investors can expect a sharp downturn in the bear market in the presumably not-too-distant future.

Although deep red arrows are known to tug at investors’ heartstrings, significant pullbacks in Wall Street’s major stock indexes can also represent generational buying opportunities for bullish long-term investors.

Although most investors dislike stock market corrections and bear markets, these events are a natural and healthy part of the investment cycle. Since downturns are typically emotionally driven, there is little that can be done, from a monetary or fiscal policy perspective, to prevent double-digit declines.

The positive side for investors is that bull and bear market cycles are not linear.

A May 2026 article on Bespoke Investment Group’s

On the one hand, the typical S&P 500 bear market bottomed out after an average of 286 calendar days (about 9.5 months). For comparison, the average S&P 500 bull market persisted for 1,023 calendar days, about 3.6 times longer than the average bear market.

More than a century of retrospective S&P 500 total return data from Crestmont Research offers even more reason for patient investors to rejoice.

Crestmont analysts calculated the 20-year rolling total returns, including dividends, of the S&P 500 since 1900. This involved tracking its constituents in other major indexes before the S&P was officially established in 1923.

Crestmont’s analysis resulted in 107 rolling 20-year periods (1900-1919, 1901-1920, and so on, through 2006-2025), all of which produced a positive average annual total return. I repeat, 107 of the 107 rolling 20-year periods generated a profit, including dividends.

Even if someone had hypothetically invested at a stock market peak, or during a recession, depression, war, pandemic, etc., they would still have made money if they held an S&P 500 tracking index for 20 years.

Patience is a virtue and a path to potential riches on Wall Street. If the $1.5 trillion margin debt bubble bursts, consider this an opportunity to pounce.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Motley Fool has a disclosure policy.

Wall Street’s Biggest Bubble Looks Ready to Pop, and I’m Not Talking About AI or Quantum Computing was originally published by The Motley Fool