Is the AI Bull Market About to Crash? This Risk Indicator Is Saying Yes
Margin debt just hit a level that has historically preceded some of the worst market collapses in recent memory, and one closely watched risk indicator is now flashing a warning that most AI investors are ignoring.
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The AI trade keeps raising the major indexes. The Invesco QQQ Trust (NASDAQ:QQQ) is up 22.02% year to date. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has gained 12.86% over the same stretch. Earnings explain part of that rise. A less-watched number shows how investors are paying for it: FINRA margin debt.
Margin Debt Shows How the AI Rally Is Paid For
Margin debt is money investors borrow from their brokers, using their portfolios as collateral, to buy more stock. Revenue and earnings measure how companies perform. Margin debt measures how investors are positioned. It tells you how much of the rally rests on borrowed money that a broker can call back.
Leverage cuts both ways. When prices fall, brokers can issue margin calls, and the forced selling that follows can deepen a downturn. A 20% decline in a portfolio with no borrowing hurts, but long-term holders can ride it out. An investor who financed 50% of the position with borrowed money could lose approximately 40% of their original equity in that same decline, before interest costs.
Borrowing Hit a Record, Then Pulled Back
According to FINRA, margin debt rose from approximately $851 billion in April 2025 to a record $1.502 trillion in June 2026. This marks a 77% increase in just 14 months. Borrowing has eased since then, but August’s reading of $1.454 trillion was still 37% above its level a year earlier.
Past cycles make the comparison uncomfortable. Margin borrowing jumped 80% before the 2000 dot-com collapse. It rose 66% ahead of the 2007 financial crisis and the S&P 500’s later 57% decline. It rose 95% before the 2022 bear market. The current run falls inside that range.
Carrying that debt is also getting more expensive. The 10-year Treasury yield is at 5.24%, up from 3.97% on February 27. That puts it in the 98.4 percentile of its readings over the past year. The Federal Reserve also raised the upper bound of its target rate to 4.00% from 3.75%, which raises the cost of holding leveraged positions. Investor Michael Burry said this week that he now thinks the AI bubble “may burst” sooner than he first expected. Riding a mania is fine as long as you plan the exit, which is the whole subject of our free bubble survivor’s handbook.
Why Other Gauges Still Look Calm
The wider economy looks steadier. The VIX, Wall Street’s fear gauge, stands at 16.39, inside its normal 15-20 range. The Sahm Rule recession indicator reads 0.00, well below its 0.50 trigger. The gap between 10-year and 2-year Treasury yields is positive at 0.45%, so the yield curve is not inverted. M2 money supply grew 5.7% from a year earlier, which is a normal pace. With the economy holding up, the main risk sits in investor portfolios.
Signals That Would Confirm or Defuse the Warning
- Bullish: Margin debt keeps inching lower from its June peak while QQQ and SPY hold their gains. That would suggest investors are reducing leverage gradually.
- Bearish: Borrowing climbs back above the June record while the 10-year yield stays above 5%. A sharp drop in margin debt alongside falling prices would also be a warning, since that pattern points to forced selling.
Bottom Line for AI Investors
Earnings show what the AI boom is worth on paper, but margin debt shows how fast that value could disappear if borrowers are forced to sell.
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After two decades of patrolling the dark corners of suburbia as a police officer, Rich Duprey hung up his badge and gun to begin writing full time about stocks and investing. For the past 20 years, he’s been cruising the markets looking for companies to lock up as long-term holdings in a portfolio while writing extensively on the broad sectors of consumer goods, technology, and industrials. Because his experience isn’t from the typical financial analyst track, Rich is able to break down complex topics into understandable and useful action points for the average investor. His writings have appeared on The Motley Fool, InvestorPlace, Yahoo! Finance, Money Morning, and, of course, 24/7 Wall St. He has been featured in both U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, and USA Today.
