As an experiment, I played a game with Charlemagne and reckless disregard for the settlement limit. I ended up with 57 out of 20 settlements. The end result was fairly powerful (but not overly so), but it took quite some time to get there. The happiness issues in the cities can be solved (but it takes some time), but it is much more tricky in towns (in which you don't want to invest too much anyway). So you end up with quite a few unhappy towns, which don't contribute that much. Of course, you have many towns and then it evens out somewhat. It works as a playstyle, but I don't think it is optimal and does not need to be nerfed.
I feel like I could have optimized more: hug the settlement limit for longer until more of the empire has been developed and you can go over the settlement limit without impacting your growth curve that much, but then I would have had less time to conquer as many settlements.