Investor optimism has been so unrestrained recently that good earnings are beginning to be dismissed because they do not meet exaggerated expectations.

Take Goldman Sachs (GS.N) this week, for example. It beat earnings expectations by 23 percent on a per share basis but the announcement was met with disappointment.

Stocks fell and the dollar rose initially when the results came out because the market was so ebullient it was willing to believe a so-called "whisper number" for the earnings at the wildest edge of speculation.

In the event, stocks recovered to close higher on the day. But disappointments were the order of the day on Friday.

Nonetheless, world stocks begin next week at 12-month highs, up well over 70 percent from their March lows. High-yielding currencies are in huge demand and emerging market debt spreads have narrowed about half a percentage point in October alone.

Underlining it all, measures of the volatility of Wall Street stocks are falling. The VIX volatility index .VIX, the "fear gauge", has broken below its recent range and is now at "normal", pre-crisis levels.

This all points to risk-hungry investors entering a new week with the bit between their teeth again, despite the odd disappointment such as Friday's Bank of America (BAC.N) loss.

"Earnings turned in the second quarter of this year. We are on track for a good 18 months of corporate earnings growth," said Bob Parker, vice chairman of Credit Suisse's asset management arm.

The market is enjoying high levels of liquidity, a store of investor cash and generally positive economic numbers, he said.

Underlying economic numbers such as Chinese trade and lending, UK unemployment, U.S. retail sales and euro zone manufacturing have come in better than expected.

Reuters polls this week found expectations among economists that the U.S. and euro zone economies came out of recession in the third quarter.

RISK APPETITE

There are, nonetheless, the four risks. Much of the latest tranche of the stock rally is based on optimism over earnings.

Notwithstanding Goldman's failure to meet excessive expectations and the Bank of America results, many reports have been positive, among them JPMorgan Chase (JPM.N), Google (GOOG.O) and IBM (IBM.N). 

Thomson Reuters Proprietary Research shows that as of Thursday, with 10 percent of S&P 500 index .SPX companies having reported, 82 percent had beaten expectations.

Should many others come in below forecast or expectations rise too high Goldman-like, the market would be vulnerable to a quick reversal.

Retailers will be in focus next week and Europe will have its first full week of reporting. Results are due from Apple (AAPL.O), Nestle (NESN.VX), Danone (DANO.PA), Coca-Cola (KO.N), Cadbury (CBRY.L), Hershey (HSY.N), LVMH (LVMH.PA), PPR PPR.PA, Ahold (AHLN.AS) and Home Retail (HOME.L).

Government bond yields, in the meantime, have been rising modestly this month as equities have gained and risk appetite built up. The risk is that this becomes more rapid, creating a sell-off that would send borrowing rates through the roof.

The factors mitigating against this are continued low rates and quantitative easing from central banks along with muted inflationary pressures.