Euphoria sweeps across Wall Street. How long will it last?

What a difference a year makes. Last year, recession fears set off Wall Street’s worst December since the Great Depression. Now, US stocks are capping off a blockbuster year with yet another dose of extreme optimism.

The swing in sentiment has been most pronounced over the past two months.

A net 68% of global fund managers now say a recession is unlikely in 2020, according to a Bank of America survey released on Tuesday. (Net percentage means those expecting an outcome minus those not expecting it). It’s the largest two-month drop in recession jitters since May 2009, the next-to-last month of the Great Recession.

“The bulls are alive,” Michael Hartnett, chief investment strategist at BofA Global Research, wrote in the report.

Recession fears have receded for three primary reasons: The US-China trade war is cooling off, the global economy is showing hints of bottoming and central banks are coming to the rescue with easy money.

The BofA survey of 199 investors who control $627 billion in assets showed several bullish developments:

• A record two-month upswing in global growth expectations
• The biggest two-month jump in profit expectations since May 2009
• Cash levels have dropped to just 4.2%, a six-year low
• Investors are buying stocks, commodities and economically-sensitive banks and energy stocks

Taken together, the findings underscore the powerful shift that has carried Wall Street to new heights. The Dow, S&P 500 and Nasdaq finished at record highs Monday. All three are now up more than 20% on the year, led by the Nasdaq’s 33% spike.

Extreme greed is back

The CNN Business Fear & Greed Index is flashing “extreme greed,” a reversal from the “extreme fear” gripping markets a year ago. The gauge of market sentiment is nearing the highest levels of the past three years.

The latest gains come on the heels of the United States and China announcing a preliminary trade agreement. Although the “phase one” deal is short on details, it does suggest the trade war has stopped getting worse, at least for now.

“We may have reached the point of ‘peak tariffs,'” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a report. “This could unlock further upside for equity markets, driven by improvement in business confidence and a recovery in investment.”

Both UBS and BlackRock, two of the world’s largest asset managers, announced Monday that they have become more bullish in recent days.

Tech stocks haven’t been this pricey since 2007

Of course, there is no guarantee this newfound optimism will prove correct. Just as recent recession fears were overdone, this bullishness may be exaggerated. Markets tend to overreact–to both the upside and the downside.

BofA seems to be predicting just that. Hartnett wrote in a separate report last week that markets are “primed” for a first-quarter “risk asset melt up” that carries the S&P 500 to 3,333 by early March. But Hartnett expects the 2020 gains to be “front-loaded,” a point underlined by BofA’s year-end target of 3,300 for the S&P 500.

One risk facing US stocks is that they’ve suddenly become more expensive. The powerful rally has been driven almost entirely by higher valuations, not improved earnings expectations.

The S&P 500 is now trading at 18.6 times projected earnings, according to Refinitiv. That is well above the 10-year average of 15.2.

And the tech sector is now sporting the highest price-to-earnings ratio since November 2007, according to Bespoke Investment Group. Although tech’s valuation remains well below the extreme of the late 1990s dotcom bubble, this could eventually become a headwind.

Tech and growth stocks are now ranked as the most “crowded” trade by investors polled by BofA.

The problem with crowded trades is they can reverse quickly if everyone hits the exit at the same time.

If nothing else, rising valuations raise the bar for 2020.

“Many markets in 2019 rallied on hopes for this [trade] deal and the economic improvement that would follow,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note to clients. “In 2020, at current valuations, those hopes better be realized.”

Morgan Stanley: The Fed is ‘pumping up’ stocks

Another potential obstacle is the Fed. After three straight rate cuts, the US central bank has signaled it wants to hold interest rates steady.

Yet at the same time, the Fed is injecting vast amounts of money into the financial system. The Fed’s purchases of Treasury bills, aimed at easing stress in the overnight lending market, has ballooned the size of its balance sheet by more than $300 billion since early September.

Although the Fed argues its cash injections are not aimed at boosting the economy or markets, a growing number of analysts say these purchases are inflating stocks, even if that wasn’t the goal.

“Such liquidity is pumping up financial valuations,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, wrote in a note on Monday.

But the Fed can’t inject cash into the system forever.

Shalett, who flagged the potentially “dangerous dynamics” of the Fed moves, expects the balance sheet expansion to end in the first quarter.

At which point, the market will be flying solo.