What an amazing rebound it's been: The S&P 500 is up 50% since March. JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS) are now both up over the past year. Wells Fargo (NYSE:WFC) isn't too far behind.

It's like the crash of 2008 never even happened.

Everything is fine, people. Everything is fine!
That's the general takeaway from Merrill Lynch's Survey of Fund Managers for August. And it's a frightening one, really.

The survey, consisting of 204 fund mangers controlling more than half a trillion dollars in assets, shows that market optimism is now about as high as it's been since 2007.

Among the survey's findings:

  • Average cash balances have shrunk to 3.5%. That's the lowest level since July 2007.
  • Thirty-four percent are "overweight" equities (stocks). That's the highest level since October 2007, when the Dow Jones topped out above 14,000.
  • Seventy-five percent expect the global economy to strengthen in the next 12 months -- the highest percentage since November 2003, and up 63% over last month.
  • Seventy percent expect global corporate profits to rise in the next year. That's up 51% over last month.
  • Confidence in corporate health is the highest it's been since January 2004.
  • Merrill's "Risk and Liquidity Indicator," a gauge of investors' appetite for risk, is at the highest level in two years.

Ready for the survey's most telling finding? "[W]ith four out of five investors predicting below trend growth for the year ahead, a nagging lack of conviction about the durability of the recovery remains."

Mmm-hmm.
I don't necessarily disagree with the fund managers. We've avoided the abyss, and bargain stocks can still be found. But a situation where deep-pocket investors are giddy, optimistic, and lacking conviction about the durability of recovery is dicey. It's a sign that people are expecting the best, yet ready to jump ship at the slightest hint of anything less.

This doesn't mean we're about to run off a cliff. In fact, November 2003 -- the last time we were this optimistic about the global economy -- was a great time to invest (the S&P 500 gained 50% over the next four years).

And I'll say it again: Bargains are out there. As fellow Fool John Rosevear pointed out yesterday, high-quality companies like Procter & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ), and Total SA (NYSE:TOT) still trade at attractive valuations. Heck, Allstate (NYSE:ALL) trades at just over seven times forward earnings. All isn't lost for patient, bargain-hunting investors.

But the sudden surge of optimism and market activity will be seen by some as a sign that we're back at the same unquestioned confidence that brought us down in the first place. The past decade -- no, all of history -- has been underlined by wild swings in investor emotion where, in hindsight, the masses run too far in extreme directions. Think about that.

This isn't market timing. No one's saying that stocks can't and won't go higher from here. But a lot of people are now counting on everything to go right. And that's a scenario more likely to end in tears than triumph with an economy as fragile as it is.

This is especially true now that, as my colleague Alex Dumortier has shown, the broad market indices aren't cheap by historical standards.

What do you think? Is the market getting ahead of itself at these levels? Take a moment to weigh in with our Fool poll below.

Fool contributor Morgan Housel owns shares of Procter & Gamble and Johnson & Johnson, but none of the other companies mentioned in this article. Nor is he short anything, so hold off on the hate mail, m-kay? Johnson & Johnson, Procter & Gamble, and Total SA are Motley Fool Income Investor selections. The Fool owns shares of Procter & Gamble and has a disclosure policy.