(Bloomberg) — One reason the first Covid crash was so brutal back in March 2020 was all the froth that built up in markets before the virus landed. While there are differences for traders navigating the latest scare, a lot is the same, too.

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Chief among the similarities is a prevailing sense of comfort that investors found in solid economic data, robust earnings and an accommodative Federal Reserve. From retail amateurs to professional money managers, equity positioning sits at levels of bullishness that could exacerbate a reversal.

Viewed from the perspective of valuations, the stock market is notably more stretched than it was at the 2020 turning point. The S&P 500’s price-earnings ratio now stands about 2 points above where it was almost two years ago. While it’s too early to predict the economic and policy implications from the Covid variant that just emerged in Africa, uncertainty over its spread was enough to knock the S&P 500 down 2.3% on Friday.

“The market viewed the pandemic essentially in the rearview mirror,” David Riley, chief investment strategist at BlueBay Asset Management, said in an interview on Bloomberg TV with Lisa Abramowicz. “What this unwelcome news has done is challenge that assumption. And the assumption was that we go from pandemic to endemic where we learn to live with Covid, the macro and market impact is pretty limited and diminishing over time.”

Indeed, the Covid threat barely came up when Wall Street strategists were listing investment threats in their year-ahead outlook for the equity market. In the latest Bank of America Corp. survey, fund managers had ranked Covid-19 as only the fifth-biggest tail risk, behind inflation, central bank rate hikes, stalling Chinese growth and asset bubbles.

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Stocks sold off worldwide Friday as governments from the U.S. to Hong Kong tightened restrictions on travel from countries in southern Africa. The S&P 500 had its worst decline since February. Traders flocked to protective options, sending the Cboe Volatility Index to its biggest jump since January.

Investors dusted off the old pandemic playbook, dumping airlines while seeking safety in haven assets like Treasuries. Also back in favor were stay-at-home shares that benefit from higher demand in lockdowns, such as Zoom Video Communications Inc. and Peloton Interactive Inc.

Of course, nothing yet suggests that anything like the drubbing that occurred in early 2020 is in offing for markets now. Today’s world is in many ways better prepared to navigate the health threat, with vaccines and therapies available and a growing population taking shots.

While risk tolerance was extremely high heading into the latest episode, that backdrop is the direct result of conditioning over two years when every impulse to buy into panic was rewarded. When the delta variant surged over the summer, for instance, the S&P 500 endured multiple pullbacks, and yet none was big enough to halt the record-setting advance.

That may be the case now, too, according to John Spallanzani, portfolio manager at Miller Value Partners. He said thin trading around the Thanksgiving holiday into the weekend may have amplified the selloff.

“We are usually buyers of market dislocation not rooted in fundamental facts,” he said. “Africa has some of the lowest vaccination rates in the world and this will most likely push more folks to get vaccinated which is a positive longer term,” he added. “This should not derail the global recovery.”

Up until recently, the consensus appeared to be that the latest spike in Covid cases was nothing to worry about. Earlier this week, Morgan Stanley advised investors to look through the flare-up in infections, and JPMorgan Chase & Co. concurred that fourth wave “is unlikely to be a material, or sustained, problem.”

The economy is in better shape, expanding 4.9% in the quarter just ended — almost double the pace in the period before the pandemic outbreak. Corporate America has found ways to cope with issues like supply chain disruptions, beating analysts’ profit expectations like never before. For the current quarter, S&P 500 firms are estimated to report a 19% increase in earnings, compared with flat forecast growth at the start of 2020.

All the strength points to a greater fundamental buffer to shocks, though for a market where everyone is geared up for the upside, the vulnerability could be in the opposite direction.

Investors have poured almost $900 billion into equity funds in 2021 — exceeding the combined total from the past 19 years — according to data from Bank of America Corp. and EPFR Global. That, along with a 20% share appreciation, has pushed households’ equity holdings as a percentage of their financial assets to levels that dwarf the dot-com era.

From stock pickers to computer-driven funds, their exposure this month stood in the 88th percentile of the historic range, data compiled by Deutsche Bank AG show. That’s roughly the same reading that foreshadowed the end of the last bull market.

Like valuations, elevated positioning is usually not an effective timing tool. What it tends to do is exacerbate the rout when sentiment sours and selling begets selling. A hint of what might come can be found in this week’s carnage in the expensive technology shares that hedge funds had piled into.

With Covid restrictions spreading and a new strain raising fears that it could escape the immunity offered by vaccines, investors may be forced to rethink their bullish stance, according to Anna Stupnytska, global macro economist at Fidelity International.

It “has the potential to be a game-changer for the near-term macro and market outlook – and should be treated as such,” she said. “For markets, this festive season might turn out to be more volatile than investors have been hoping for.”

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