"The Nasdaq has risen for 7 consecutive months," "Mag 7 rises alone," investors seem to firmly believe that U.S. stocks will only go up? "The most optimistic people" are starting to worry

Despite the fact that the U.S. stock market has entered the traditionally best-performing month of November, the divergent trends in the market are causing even the most optimistic investors on Wall Street to begin feeling concerned.

On November 3, Wall Street Journal mentioned that Amazon signed a $38 billion computing power agreement with OpenAI, which will provide it with hundreds of thousands of NVIDIA GPUs. This news pushed Amazon's stock price up by 4% and drove the "Seven Tech Giants" index up by 1.2%.

However, on Monday, disappointing U.S. ISM manufacturing data led to a market showing a strong performance in tech stocks while other sectors weakened. More than 300 companies in the S&P 500 index fell, and both the Dow Jones and small-cap indices also closed lower.

On one side are strong corporate earnings and the revolutionary narrative brought by AI, while on the other side are stretched valuations and weak market breadth. Investors seem convinced that stocks will only go higher, and this unwavering belief has begun to worry some of Wall Street's most famous bulls.

Wall Street Journal mentioned that renowned bull Ed Yardeni issued a rare warning about the U.S. stock market, believing that the overly optimistic sentiment among investors has become a contrarian indicator. He stated that in the absence of good market breadth, any unexpected event could pull the stock market down from its highs.

Deteriorating Market Breadth, Cracks in the "Foundation" of the Rally

Since April, the Nasdaq index has already rebounded nearly 40% from its lows. However, this seems to be more of a "solo celebration" by tech giants.

A key indicator of market health is "market breadth," which refers to the number of stocks participating in the rally. Currently, this indicator is flashing red.

(The widening gap between the S&P index and the S&P A/D indicator shows severe market divergence)

Moreover, while the S&P 500 index is rising, its equal-weighted counterpart is declining. This indicates that the rally is entirely driven by a few large-cap stocks, while the majority of stocks have not participated.

As Louis Navellier of Navellier & Associates stated:

Market momentum remains positive, but the concentration of returns is very high. Investors who are overweight in the AI sector have performed much better this year.

LPL Financial strategists Adam Turnquist and Jeff Buchbinder pointed out that when an index rises while market breadth does not keep pace, it indicates that the market's "foundation" is showing "new cracks."

They agree with the adage "don't fight the trend," but also remind investors that another saying is "bull markets do not rise linearly."

High Optimism, Could It Be a Contrarian Indicator?

Wall Street's famous bull Ed Yardeni has issued a rare warning about U.S. stocks, suggesting that investors' excessive optimism has become a contrarian indicator.

Ed Yardeni, founder of Yardeni Research, stated:

There are too many bulls in the market, and with poor market breadth, any unexpected event could pull the stock market down from its highs.

He believes that this widespread optimism itself is a warning signal. The S&P 500 has surged 37% since early April, a rise that has only occurred five times since 1950.

Technically, warning signals are also present. The S&P 500 is currently 13% above its 200-day moving average, which typically indicates that the rebound has become overstretched.

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

Analysts believe that this long-time bull is beginning to question his expectations for year-end gains, a shift that is particularly noteworthy since Yardeni has been a staunch supporter of the market rebound since April, with his target of 7,000 points for the S&P 500 by the end of 2025 being among the highest predicted by Wall Street strategists.

Evercore's Julian Emanuel also warned:

Record bullish sentiment increases the risk for the stock market when faced with imperfect news.

Analysts suggest that when nearly everyone expects the market to rise, any negative news could be amplified, leading to a reversal in the market.

Bret Kenwell from eToro added, as the Federal Reserve forces investors to reconsider the possibility of a rate cut in December, any significant deterioration in market sentiment could trigger a sell-off.

Historically Strong Year-End, Can It Offset Pullback Risks?

Looking ahead, historical data provides strong support for bulls.

According to Bespoke Investment Group, since 1928, the S&P 500 has risen more than 10% year-to-date as of the end of October on 40 occasions. Following this, the average gain in November has been 2.6%. The firm's strategists stated:

The old market adage "rising begets rising" applies here.

CFRA's Sam Stovall also believes that although recent gains may face brief digestion, he still expects stock prices to continue rising before year-end. However, some analysts warn that given the strong performance over the past six months, some of the gains may have been "pulled forward."

Anthony Saglimbene from Ameriprise believes that, in addition to the technical and overall market's short-term overbought conditions potentially triggering a brief pullback before year-end, the fundamentals of the most sought-after stocks in the market are "very strong." Michael Brown from Pepperstone also stated:

In my opinion, the path of least resistance for the stock market remains upward by the end of the year.

He believes that impressive earnings growth, the resilience of the U.S. economy, and a loose monetary backdrop all contribute to the positive outlook