Wall Street Prophet Yardeni: "Too many bulls," technical indicators suggest the US stock market may be overextended.

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Wall Street's famous bull Ed Yardeni issued a rare warning about U.S. stocks, saying that excessive investor optimism has become a contrarian indicator, and technical indicators show the rally has been overstretched. The S&P 500 may fall back 5% from its high before year-end.

On November 3rd, according to media reports, Ed Yardeni, founder of Yardeni Research, said that "there are too many bulls" in the current market. After a six-month surge, investors' strong conviction that stocks only rise and don’t fall is becoming a worrying signal. The S&P 500 has soared 37% since early April, a gain seen only five times since 1950.

Technical indicators are also flashing warning signs: The S&P 500 is currently 13% above its 200-day moving average, which usually means the rebound has been overextended. The Nasdaq 100 is 17% above its long-term support, approaching the largest gap seen in July 2024—at which point the market subsequently sold off in August due to the unwinding of yen carry trades.

(S&P 500 daily candlestick chart, orange line is the 200-day moving average)

Analysts say that this long-standing bull is starting to question his expectations for a year-end rally, and this shift is especially noteworthy because Yardeni has been a steadfast supporter of the rebound since April. His S&P 500 end-2025 target of 7,000 is among the highest on Wall Street.

Nevertheless, Yardeni still suggests investors "buy on dips if you have cash" and not to try to sell ahead of a major correction. He does not expect a significant pullback of more than 10% in the short term.

Market Sentiment Reaches Extreme Levels

Investor confidence has climbed to its highest point in a year.

According to analysis by Yardeni Research, the Investors Intelligence survey of newsletter writers showed the bull-bear ratio jumping to 4.27 in the week of October 29, significantly surpassing the historical threshold of 4.00 that marks excessive optimism.

Retail investors are also full of confidence. The American Association of Individual Investors' (AAII) weekly survey showed bullish sentiment exceeding the historical average of 37.5% in five out of the past seven weeks. This widespread optimism has sparked Yardeni’s concern, as he says "there are too many bulls."

Yardeni said by phone:

"The key question is whether the rally has already overshot, and if it can continue into the year's final months. Given the poor market breadth, just a single unexpected event could knock stocks off their highs, but since traders usually stay optimistic around the holidays, it may be hard for that to happen."

Technical Indicators Flash Warning Lights

After the sharp rebound in the S&P 500, key technical indicators are approaching historical extremes. The S&P 500's premium over its 200-day moving average is 13%, potentially suggesting the rally is overdone.

The situation is even more extreme for the Nasdaq 100, which is now 17% above long-term support, close to the biggest gap in July 2024. At that time, the market suffered a sell-off in August triggered by the unwind of yen carry trades, jolting the market.

(Chart shows Nasdaq daily candlestick chart, orange line is the 200-day moving average)

These technical signals are prompting Yardeni to reassess his views.

Although he still maintains his S&P 500 target of 7,000 by the end of 2025—which is only about 2.3% above last Friday’s closing price—he expects the index may fall up to 5% from the highs before the end of December.

However, other well-known bulls like Tom Lee, Head of Research at Fundstrat Global Advisors, believe that euphoric sentiment can persist for weeks or even months before the market suffers a significant decline. Lee continues to buy on dips and remains optimistic about November’s strong seasonal performance.

Year-End Rally Faces a Test

As 2025 draws near, the market’s focus shifts to the Fed’s policy path.

Traders are betting on rate cuts at a faster pace than the signals given by the central bank, making this week’s speeches by around a dozen central bank officials particularly important, including New York Fed President John Williams, Governor Chris Waller, and Michelle Bowman.

Analysts note that investors' confidence is largely unmoved by Fed Chair Powell’s cautious stance regarding the possibility of another rate cut in December, which only accentuates the gap between market and central bank expectations. As a result, any forward guidance officials give about the timing of the next rate cut will be closely watched.

On the economic data side this week, Wall Street will analyze U.S. factory activity and manufacturing data to assess the economy’s health. Results from companies such as McDonald’s, Uber Technologies, and Lyft will also help Wall Street judge consumer confidence.

More than half of index constituent companies have reported their quarterly earnings, and the index is on track for its ninth consecutive quarter of profit growth, with profits expected to rise 13%—almost double the pre-quarter estimate of around 7%.

Despite the warning, Yardeni still recommends investors "buy on dips if you have cash," but not to sell in anticipation of a major pullback. He does not think the market will see a significant correction of more than 10% anytime soon.

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