Irrational Exuberance & the Bullish Consensus
Weekly Investment Update | By Brian Schreiner
Wall Street analysts are famously bullish, but their targets for the S&P 500 in 2026 are unanimously bullish and the most concentrated in nearly a decade, which is actually a contrarian indicator. On average, analysts are expecting the S&P to increase by 11% this year. Their outlook is centered on strong corporate earnings, accommodative Fed policy and economic growth boosted by tax cuts and fewer regulations.
The most bullish forecast from Oppenheimer & Co. is projecting a gain of 18% for the S&P and the least bullish forecast from Stifel Nicolaus & Co. projects a 2% increase. The strong consensus comes at a time when, in our view, risks to the stock market and the economy range far and wide.
Last week I compared the AI bubble to the telecom bubble in the late 90s, where massive capital spending on rapidly depreciating infrastructure created a valuation gap that revenues can’t bridge and where the ultimate are leaner second-movers who capitalize on the infrastructure left behind by today's irrational exuberance.
As we begin 2026, the asset markets and the economy are full of risks, contradictions and K-shapes that will eventually be resolved. Next week, in my 2026 Investment Outlook, I’ll go in-depth to explain how we’re investing and why. This week I want to review some timeless concepts that are especially important in light of today’s market euphoria.
10 Market Rules to Remember
Bob Farrell, a legendary figure in Wall Street history, is best known for his 25-year career as Chief Market Analyst at Merrill Lynch. Despite being educated in fundamental analysis by the fathers of value investing, Benjamin Graham and David Dodd, Farrell pioneered a unique approach that blended technical analysis with market psychology.
AI version of Robert J. “Bob” Farrell, First President CMT Association
For over two decades, he was widely considered the preeminent voice on market direction, earning the top spot in Institutional Investor’s annual analyst rankings for 16 out of 17 years. In 1970, Farrell co-found the Market Technicians Association, now the CMT Association and is most famous for his "10 Market Rules to Remember," a set of timeless principles he codified in 1998 to help investors navigate the emotional extremes of bull and bear markets.
Rule 1: Markets tend to return to the mean over time. The historical average yearly return of the S&P 500 is 9.5% over the last 150 years, in nominal (not adjusted for inflation) terms. Over the past decade, the Vanguard S&P 500 ETF (VOO) has returned 14.8%. Over the past 5 years, 14.4% and over the past 3 years, returns have been more than double their historical average, 23.0%. And last year, the S&P 500 was up 17.8%. A rubber band stretched too far must be relaxed to be stretched again. After a strong uptrend, prices tend to revert to their long-term trend.
Rule 2: Excesses in one direction will lead to an opposite excess in the other direction. Markets seem to respond to Newton’s third law of motion: “For every action, there is an equal and opposite reaction.” History shows that markets that overshoot on the upside also overshoot on the downside. Like a pendulum, the further it swings to one side, the further it rebounds to the other side. Excesses in the stock market aren’t resolved by calm, extended sideways moves. History shows that they’re resolved by a series of fast sell-offs or one big crash.
Rule 3: There are no new eras — excesses are never permanent. Market history is full of famous examples of new technologies that drive speculative interest. From the Dutch Tulip Mania and the South Sea Bubble to the Dot-Com Bubble and the Sub-Prime Real Estate Crisis, all of these excesses were driven by investors who believed, “this time is different.” AI may be a fantastic achievement on par with the railroads and the internet. The AI bubble is not a bubble in the idea or in the innovation. The bubble is in investor behavior and in the price investors are paying to participate in the excesses of the buildout.
Rule 4: Exponential rapidly rising or falling markets usually go further than you think. I believe the main driver behind excess speculation in new technologies exists because, as the bubble continues to expand without popping, investors are conditioned to believe over time that since the bubble hasn’t popped that it will never pop and we have entered a new permanent era. The reality that will eventually be realized is that the market cycle has not been repealed and excess speculation will be punished. The correction comes after a period of time that is much longer than we expect due to the fact that investors are thoroughly convinced. As Mark Twain said, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."
Rule 5: The public buys the most at the top and the least at the bottom. Fear and greed drive investors to be most bullish at market tops and most bearish at market bottoms. Emotional buying and selling are driven by crowd behavior. Research shows that optimistic people think alike and show similar brain patterns, while pessimistic people are more neurodivergent, showing rather distinctive patterns that differ from person to person. The best investors have a contrarian mindset. As Warren Buffett famously said, “Investors should be fearful when others are greedy and greedy when others are fearful."
Rule 6: Fear and greed are stronger than long-term resolve. Discipline, patience and persistence are fragile while fear and greed are strong emotions that can cloud decision-making and affect your long-term plan. Gains make us exuberant because they enhance well-being and promote optimism. Likewise, losses bring sadness, disgust and regret. Losses make us fearful, increase the sense of risk and promote pessimism. The Buffett quote above applies here too. Stay patient, disciplined and persistent around a long-term strategy that stays true to your risk tolerance and avoid the trap of emotional buying or selling.
Rule 7: Markets are strongest when they are broad, and weakest when they narrow to a handful of blue-chip names. Market breadth, or participation, is one of the most critical indicators of the health of the stock market. While the major indices often mask underlying strength or weakness, market breadth tells the true story. A rally on narrow breadth means relatively few stocks are advancing and the probability of a market correction is higher than normal. Market breadth was narrow for most of 2025 but broadened in the fourth quarter. This indicator will be an important one to watch in 2026.
Rule #8: Bear markets have three stages — sharp down, reflexive rebound, and a drawn-out fundamental downtrend. Many investors mistakenly believe that they will be able to identify a bear market and quickly adjust their portfolio to avoid the worst losses. The problem is that bear markets tend to start with a sudden, sharp decline. After the fast decline, the market tends to bounce, retracing part of the decline and giving investors relief. The next phase of the decline is slower with a few rallies sprinkled in, giving investors confidence that the market will return to its previous highs, but market technicals and fundamentals have already deteriorated and the losses have been realized.
Rule #9: When all the experts and forecasts agree — something else is going to happen. The theory behind this rule is simple: If everyone is optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell? Excess forms when the consensus is the strongest and when nearly everyone is on the same side of a trade. Ultimately, there is no one left to buy (or sell) the shift in sentiment occurs and a stampede begins in the opposite direction.
Rule #10: Bull markets are more fun than bear markets. Investors are driven by emotions. Investor sentiment, momentum and trend drive prices more than anything. Psychologically, as the markets rise, investors believe they are smart because they’re making profits. In reality, their success is a matter of circumstance or luck. Inventors feel euphoric or psychologically superior during bull markets and during bear markets they are gripped by fear, panic and anxiety.
No matter how many times markets repeat these cycles, human beings will experience the emotions they elicit. Successful investors have a contrarian mindset; they’re aware of their emotions, and they study market history.
“Change of a long term or secular nature is usually gradual enough that it is obscured by the noise caused by short-term volatility. By the time secular trends are even acknowledged by the majority, they are generally obvious and mature. In the early stages of a new secular paradigm, most are conditioned to hear only the short-term noise they have been conditioned to respond to by the prior existing secular condition. Moreover, in a shift of secular or long-term significance, the markets will be adapting to a new set of rules, while most market participants will still be playing by the old rules.”
Bob Farrell, Merrill Lynch
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