Goldman Sachs risk indicators soared to historic highs! Wall Street is in a state of "extreme excitement", is it a sign of growth and prosperity or a prelude to a peak?

Noticeably, optimism among Goldman Sachs clients has surged to the highest levels in about a year, overwhelming concerns about geopolitics and macroeconomic issues. Data from Goldman Sachs' trading division shows that the "risk appetite indicator" has climbed to its highest point since early 2025, in the 96th percentile of historical levels. Goldman Sachs Managing Director Lee Cooper Smith stated that while an increase in risk appetite is typically seen as a signal of investor exuberance, the dynamic growth momentum in the U.S. and other regions may prove that this time the bullish outlook is well-founded. In a report to clients, he wrote, "While an increase in risk appetite is not a sell signal in and of itself when underpinned by a supportive macro backdrop, the optimism could persist longer than many expect. The driving force behind this phenomenon is healthy global growth optimism has surged." However, Cooper Smith added, "At these levels, minor pullbacks often become more frequent, and excess stock returns become rarer." After achieving double-digit returns for three consecutive years, the S&P 500 Index rose by about 0.7% in 2026 and fluctuated near historical highs. This aligns with Goldman Sachs' indicator and the optimistic views of Wall Street strategists, who generally expect the S&P 500 Index to perform strongly again this year. Geopolitical concerns did see a breakthrough on Wednesday as the benchmark index dropped by about 1% due to worries about possible U.S. action against Iran. Optimism in Growth Goldman Sachs stated that the indicator measuring global growth optimism has jumped significantly, with investors showing a preference for stocks over bonds, cyclical stocks over defensive stocks, as well as narrowing credit spreads and rising inflation expectations all typical of a pro-growth allocation. The bank said that this shift is particularly evident in U.S. cyclical sectors, indicating confidence in growth. Bloomberg data compiled shows that small-cap stocks (preferred during economic optimism) were poised to outperform the S&P 500 Index for the ninth consecutive trading day on Wednesday, matching the longest winning streak since the financial crisis. Other sentiment indicators also conveyed the same message. Goldman Sachs' Marquee client survey showed that bullishness has only been seen three other times in the past decade at the end of 2017, 2020, and 2024. The bank noted that on two of those occasions, the market experienced a pullback within three months. Goldman Sachs pointed out that the key difference this time is the breadth of positioning. About 22% of respondents still consider themselves bears, indicating that while positive sentiment is high, it has not yet reached a dangerous "one-sided" state.