"There are too many bulls": what worries one of Wall Street's top optimists?

By the end of December, the S&P 500 Index may fall back by 5% from its peak level, warns Ed Yardeni, head of Yardeni Research. His caution is notable because after the market collapse in April, Yardeni was one of the most convinced optimists among strategists, writes Bloomberg. His prediction that the S&P 500 would reach 7,000 points by the end of the year was one of the highest on Wall Street. At the end of trading on November 3, the index of U.S. stocks was only 2% short of this level.

But investors' unwavering belief that the market will continue to rise caused the economist to question his own forecast, Bloomberg notes.

"There are too many Bulls," Yardeni told the agency in a phone interview.

After collapsing in early April due to the threat of a trade war, the S&P 500 index rose 37%. Last week, investors generally ignored Fed Chairman Jerome Powell's hawkish signal that a rate cut in December is "far from a foregone conclusion." According to Yardeni, this positive sentiment, along with technical indicators, presents a troubling signal.

"The key question is whether this rally has overtaken itself and can continue into the final months of the year," he said. - One unexpected event could knock stocks off their highs amid weak market breadth. But that could be tricky, given that traders are usually optimistic during the holiday season."

November, according to Bloomberg, has historically been the best month for stock returns in the last 30 years. Investor optimism continues to grow, with the Investors Intelligence survey showing that the ratio of bulls to bears jumped to 4.27 for the week through October 29. A result above 4.00 historically signals excessive market enthusiasm, according to an analysis by Yardeni Research. In addition, technical indicators are approaching historical extremes after a violent rally, indicating that stocks are overbought, according to Yardeni.

"Buy on drawdowns if you have the money," Yardeni says. At the same time, he urges "not to gamble or sell in anticipation of a major collapse." According to the economist, he does not expect a large-scale correction of the stock market - more than 10% - in the near future.

Optimism in the markets can last for weeks, or even months, before investors suffer losses, said in turn another famous optimist from Wall Street - the head of the analytical department of Fundstrat Global Advisors Tom Lee. He buys securities on drawdowns. "Some volatility is possible to 'digest' October's strong gains, but we expect November to be an up month," Lee wrote in a note to clients on Oct. 31.

This article was AI-translated and verified by a human editor