Is the Stock Market Shine Fading?

The seemingly unshakable belief among investors that the stock market only goes up is now causing concern for one of Wall Street's staunchest bulls, who sees this excessive optimism as a contrarian warning signal.

"Bullish sentiment is too high," says Ed Yardeni, founder of Yardeni Research, and a long-time stock market optimist. After a robust six-month rally that has largely ignored all warnings, Yardeni is beginning to question his previous 'year-end rally' outlook, especially after Federal Reserve Chair Jerome Powell's cautious statements regarding the possibility of another interest rate cut in December.

According to data compiled by Bloomberg, the S&P 500 Index has surged 37% since early April, a gain that has only occurred five times since 1950. As we enter November, historically the best-performing month for stocks over the past 30 years, Yardeni predicts a potential decline of up to 5% from the peak by the end of December, as market sentiment and technical indicators show signs of being overbought.

A Critical Juncture

"The key question is whether this rally has gotten ahead of fundamentals too quickly and whether it can be sustained in the final months of the year," Yardeni states. "With poor market breadth, it would only take an unexpected event to cause the stock market to pull back from its highs, but given that traders are usually optimistic before and around the holidays, such a pullback may be difficult to materialize."

One metric suggests that current investor bullish sentiment is at a one-year high. An analysis by Yardeni Research shows that the ratio of bulls to bears in an Investors Intelligence survey of newsletter writers for the week ending October 29 rose to 4.27, exceeding the 4.00 threshold that historically signifies excessive exuberance in sentiment. Another sign of rising optimism comes from the American Association of Individual Investors (AAII) weekly retail investor survey: bullish sentiment has exceeded the historical average of 37.5% five times in the past seven weeks.

Should We Be Concerned?

Yardeni's caution is noteworthy because he has been one of Wall Street's staunchest bulls since the market bottomed out in April. He forecasts a S&P 500 target of 7,000 by the end of 2025, roughly 2.3% above Friday's closing price, which is near the highest among over 20 strategists compiled by Bloomberg.

Yardeni points out that key market technical indicators are approaching historical extremes after the S&P 500's roughly $17 trillion rebound: the S&P 500 is up as much as 13% above its 200-day moving average, a large deviation that traditionally suggests the rally has become overextended. The Nasdaq 100 Index (NDX) is 17% above its long-term support level, approaching the largest deviation since July 2024, after yen carry trades led to market turbulence in August, prompting a selloff.

An Alternative View

Of course, Tom Lee, head of research at Fundstrat Global Advisors, another prominent bull, points out that optimism can persist for weeks or even months before a significant stock market downturn. Given that November has historically been a strong month for stock market bulls, he is adopting a "buy-the-dip" strategy.

"While there could be some justified chop to digest the strong October rally, we expect stocks to rally in November," Lee wrote in a note to clients last Friday. "This is still an 'unloved rally'."

The S&P 500 is up 16% so far in 2025. Data compiled by Jay Kaeppel, senior research analyst at SentimentTrader, dating back to 1920 suggests that historically, when the index is up at least 10% in the first 10 months, it bodes well for stock market returns for the remainder of the year: the median gain for the S&P 500 in November and December is 4.2%. The worst performance occurred in November and December of 1938, when the index fell 3.8%.

Potential Risks Ahead

As 2025 nears its end, all of this adds to the risks for investors, as traders are betting the Federal Reserve will cut interest rates at a faster pace than the central bank itself is signaling. This puts about 12 officials speaking this week in focus, including New York Fed President Williams, and Fed Governors Waller and Bowman. Any signals they provide about the potential timing of the next interest rate cut will be closely scrutinized.

This week is also a busy week for economic data: Wall Street will be watching U.S. factory activity and manufacturing data to gauge the health of the economy, but traders may not get the monthly jobs report on Friday due to the government shutdown.

Earnings reports this week from McDonald's (MCD), Yum! Brands (YUM), Uber Technologies (UBER), and Lyft (LYFT) will help Wall Street gauge consumer sentiment. Data from Bloomberg Intelligence shows that more than half of the companies in the S&P 500 have reported quarterly earnings, and the index is on track to achieve its ninth consecutive quarter of earnings growth, with an expected increase in profits of 13%, nearly double the roughly 7% expectations at the start of the quarter.

Yardeni concludes, "If you have cash, buy the dips. But don't do any selling in anticipation of a major decline. I don't think the stock market will see a major correction of more than 10% in the short term."