Global stocks and U.S. Treasuries are in the throes of their most "extreme" start to the year ever as bullish sentiment engulfs markets, according to Goldman Sachs.
The bank's cross-asset measure of risk appetite around the world is the highest since it started the gauge in 1991. Euphoria is turbo-charging global equities, while 10-year U.S. government bonds are suffering their worst performance in risk-adjusted terms, according to Goldman.
"Risk appetite is now at its highest level on record, which leads to the question of what future returns can be," strategists including Ian Wright wrote in a Monday note.
Investors are enjoying the fastest global expansion since the start of the decade, strong corporate earnings growth and stable economic data. Equities around the world have added over $4 trillion this year, even as major gauges flash overbought signals, while premiums on U.S. corporate bonds are back to 2007 lows.
When adjusting market moves for risk, "equities have been the extreme winner, bonds the extreme loser" so far in 2018, according to the strategists' note.
Goldman remains overweight stocks and underweight government bonds over a three- to 12-month horizon, citing strong global expansion and a hawkish monetary trajectory.
The economic outlook this year and next is better than previously anticipated but loose financial conditions and rich asset valuations suggest investors should guard against complacency, the International Monetary Fund said at the Davos gathering this week.
"While high risk appetite increases risk of disappointment, we find historically that the signal from macro data tends to trump the signal from risk appetite," Goldman said.