Wall Street prophet Yardeni: "Too many bulls," technical indicators show that U.S. stocks may have been overdrawn

Wall Street's famous bull Ed Yardeni has issued a rare warning about U.S. stocks, believing that investors' excessive optimism has become a contrarian indicator, and technical indicators show that U.S. stocks have been overextended, with the S&P 500 index potentially retreating 5% from its peak before the end of the year.

On November 3rd, according to media reports, Ed Yardeni, founder of Yardeni Research, stated that the current market has "too many bulls," and after experiencing a six-month surge, investors' firm belief that stocks only go up is becoming a concerning signal. The S&P 500 index has surged 37% since early April, a rise that has only occurred five times since 1950.

The technical picture also presents warning signals: The S&P 500 index is currently 13% above its 200-day moving average, which typically indicates that the rebound has been overextended. The Nasdaq 100 index is 17% above its long-term support level, approaching the maximum gap level seen in July 2024—when the market subsequently faced a sell-off in August due to yen carry trade unwinding.

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

Analysts believe that this long-time bull is beginning to question his expectations for a year-end rally, a shift that is particularly noteworthy since Yardeni has been a staunch supporter of the market rebound since April, with his target of 7000 points for the S&P 500 index by the end of 2025 being among the highest predicted by Wall Street strategists.

Nevertheless, Yardeni still advises investors to "buy on dips if they have cash," but not to try to sell in anticipation of a significant pullback. He believes that a major adjustment exceeding 10% is unlikely in the short term.

Market Sentiment Reaches Extreme Levels

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

According to analysis from Yardeni Research, a survey by Investors Intelligence of newsletter writers shows that the bull-bear ratio jumped to 4.27 in the week of October 29, clearly breaking through the historically optimistic threshold of 4.00.

Retail investors are equally confident. The American Association of Individual Investors (AAII) weekly survey shows that bullish sentiment has exceeded the historical average of 37.5% in five of the past seven weeks. This widespread optimism has raised concerns for Yardeni, who stated that "there are too many bulls."

Yardeni said in a phone interview:

"The key question is whether this rally has already been overdrawn and whether it can continue in the last few months of the year. Given the poor market breadth, it only takes one unexpected event to knock the market down from its highs, but since traders tend to remain optimistic around the holidays, this may be difficult to achieve."

Technical Indicators Flash Warning Lights

After a significant rebound in the S&P 500 index, key technical indicators are approaching historical extreme levels. The S&P 500 index is currently at a premium of 13% above its 200-day moving average, which may indicate that the rebound has been overextended.

The situation for the Nasdaq 100 index is even more extreme, currently 17% above its long-term support level, nearing the maximum gap level from July 2024. At that time, the stock market subsequently faced a sell-off in August due to the unwinding of yen carry trades, impacting the market.

(The chart shows the daily candlestick chart of the Nasdaq index, with the orange line representing the 200-day moving average)

These technical signals have prompted Yardeni to reassess his outlook.

Although he still maintains a target of 7000 points for the S&P 500 index by the end of 2025—just about 2.3% higher than last Friday's closing price—he expects the index may pull back as much as 5% from its peak before the end of December.

However, other well-known bulls, such as Tom Lee, head of research at Fundstrat Global Advisors, believe that sentiment may remain in an exuberant state for weeks or even months before a significant market downturn occurs. Lee continues to buy on dips, optimistic about the strong historical performance in November.

Year-End Market Faces Test

As 2025 approaches its end, market focus shifts to the Federal Reserve's policy path.

Traders are betting on rate cuts occurring faster than the signals released by the central bank, which has made the speeches of about a dozen central bank officials this week particularly noteworthy, including New York Fed President John Williams, as well as Governors Chris Waller and Michelle Bowman.

Analysts say that investors remain largely unmoved by Federal Reserve Chairman Powell's cautious stance on the possibility of another rate cut in December, exacerbating the divergence between market expectations and those of the central bank. Therefore, any roadmap provided by officials for the timing of the next rate cut will be closely scrutinized.

This week, in terms of economic data, Wall Street will interpret U.S. factory activity and manufacturing data to assess economic health. Earnings from companies like McDonald's, Uber Technologies, and Lyft will also help Wall Street gauge consumer confidence.

More than half of the constituent companies have reported quarterly earnings, and the index is expected to achieve profit growth for the ninth consecutive quarter, with profits projected to increase by 13%—almost double the pre-season estimate of about 7%.

Despite issuing warnings, Yardeni still advises investors to "buy on dips if they have cash," but not to sell in anticipation of a significant pullback. He does not believe the stock market will see a major correction of more than 10% anytime soon.