The US stock market is currently brimming with optimism, with investors seemingly convinced that stocks can only go up. However, this has raised concerns among even Wall Street's most steadfast bulls, as such overwhelming positivity may signal a contrarian danger.

Ed Yardeni, founder of Yardeni Research and a long-time bull on US equities, noted that after nearly six months of relentless gains, the market has grown overcrowded with bullish investors, largely ignoring warning signs. With traders dismissing Federal Reserve Chair Jerome Powell's cautious stance on another potential December rate cut, Yardeni is now questioning his earlier year-end rally forecast.

Data shows the S&P 500 has surged 37% since early April—a gain surpassed only five times since 1950. Historically, November has been the strongest month for returns over the past three decades. Yet Yardeni warns that with sentiment and technical indicators flashing overbought signals, the S&P 500 could pull back by up to 5% from its peak by December.

"The key question is whether this rally has gone too far and whether it can sustain through the final months of the year," Yardeni said. "While any unexpected shock could trigger a retreat, traders' typical holiday optimism may make a sharp downturn unlikely."

Investor sentiment is currently at its most bullish in a year. The latest Investors Intelligence survey (as of October 29) showed the bull-bear ratio jumping to 4.27, surpassing the critical 4.00 threshold—historically a sign of excessive optimism. Similarly, the AAII's weekly retail investor survey revealed bullish sentiment exceeding its 37.5% historical average for the fifth time in seven weeks.

Yardeni’s caution stands out, as he has been one of Wall Street’s most vocal bulls since the April market bottom, predicting the S&P 500 would hit 7,000 by year-end—about 2.3% above Friday’s close and among the highest institutional forecasts.

Key technical indicators are nearing extreme levels after the S&P 500’s $17 trillion rebound. The index is trading 13% above its 200-day moving average—a gap that typically signals overextension. Meanwhile, the Nasdaq 100 is 17% above its long-term support, nearing its widest spread since July 2024, which preceded a market shakeout triggered by yen carry-trade unwinding in August 2024.

Sentiment could remain elevated for weeks or even months before a major downturn. Tom Lee of Fundstrat Global Advisors, another prominent bull, is buying dips, citing November’s historically strong performance. "Despite potential volatility after October’s rally, we expect November to remain positive," Lee wrote in a client note, calling this the "most unloved rally."

The S&P 500 is up 16% year-to-date. Historically, a 10%+ gain in the first 10 months bodes well for the rest of the year, with November-December averaging a 4.2% rise since the 1920s, per SentimentTrader. The worst drop was a 3.8% decline in 1938.

As 2025 winds down, risks are mounting as traders bet on faster Fed easing than signaled. Speeches this week from about a dozen Fed officials—including New York Fed President Williams and Governors Waller and Bowman—will be scrutinized for clues on the next rate cut.

A busy economic calendar includes US factory and manufacturing data to gauge economic health. With the delayed nonfarm payrolls report due to the government shutdown, other data points gain importance. Earnings from McDonald’s (MCD.US), Yum Brands (YUM.US), Uber (UBER.US), and Lyft (LYFT.US) will also shed light on consumer confidence.

Over half of S&P 500 companies have reported Q3 results, with the index on track for a ninth straight quarter of growth. Profits are expected to rise 13%, nearly double the pre-season 7% estimate.

Yardeni advises, "If you have cash, buy the dips. But don’t bet on a major selloff—I don’t see a 10%+ correction happening soon."