Notwithstanding tentative signs of exhaustion over the past two weeks, the story of 2023 in equities is a tale of renewed bullish sentiment and re-positioning.

That sort of thing has a way of feeding on itself. As rallies run, anyone left behind is tempted to chase stocks higher, which can exacerbate underperformance for those wary of getting pulled in themselves, forcing them off the sidelines too. Their participation pushes things further still, and so on.

The ostensible disconnect between resilient stocks and hawkish rates is the story du jour, and many argue that between the prospect for a more aggressive Fed and negative corporate earnings growth, equities are due for a reality check.

So, just how far have sentiment and positioning rebounded, broadly speaking? Well, quite a bit, according to Goldman’s indicator, which is the highest since April of last year.

There are a couple of important points to make. First, the current bout of optimism and re-risking is more pronounced than the other bear market rallies we’ve seen over the past 12 months. Second, the bank’s indicator is still below the 50%ile — so it’s not extreme.

“The positive boost from China re-opening, better growth prospects in Asia and Europe, resilience in the US economy as well as broad deflationary pressures have been more supportive of investors’ sentiment,” Cecilia Mariotti said.

This isn’t without merit. As Nomura’s Charlie McElligott noted, the “global recession left-tail has turned right-tail” this year, with help from easier financial conditions.

Here again, there’s a self-feeding dynamic: Better sentiment tied to better growth outcomes leads to re-risking, and rallies in financial assets help ease financial conditions, which in turn rekindle animal spirits to the benefit of economic activity. Better economic outcomes are then cited for more re-risking, and around we go.

The problem with that seemingly virtuous carousel is that it can be inflationary. “What [the rates] repricing is really picking up is not simply the almost tactical removal of Fed cuts after the consensus and erroneous ‘H1 imminent recession, H2 Fed easing’ meme [was] nuked-out following robust US data releases [but also] the broad global economic data ‘upside surprises’ trend seen across China, Europe, Japan and EM,” McElligott went on.

The figure below shows you the component breakdown of Goldman’s sentiment and positioning gauge, with markers for December, January 2022 and current, to give you a sense of context vis-à-vis how things have evolved.

“Across the measures we track, our risk appetite indicator, sentiment surveys and CTAs equity positioning registered the largest bullish turn from very bearish levels,” Goldman’s Mariotti went on to say.

To be sure, not everything is screaming “euphoria.” The largest inflows YTD are in money market funds, which is hardly surprising given 5% yields on USD cash which, as a reminder you don’t need, has no credit risk (Freedom Caucus fears aside) and no duration risk either.

Ultimately, though, Goldman suspects the rapidity of the recovery in sentiment and positioning is an example of “too far, too fast,” even as the absolute level of the bank’s indicator isn’t extreme.

As Mariotti put it, “We think the speed of the rebound lowers the bar for a negative sentiment shock from here if macro data disappoint.”