It amazes me what my 2 year old manages to absorb and understand. Feels like there's a big disparity in their ability to observe and absorb compared to being able to articulate.
The real trick is, being able to observe and absorb is one thing, or indeed to articulate.
To CONTEXTUALIZE is a whole other ball game.
Observing has special risks when you're a small child and cannot work out yet that everything does not relate to you. There's a lot of bad stuff that can go on that's not the fault of the child, but a young enough child will still conclude 'I did that'.
To some degree at that young age they may still experience all actors with agency as being themselves (the whole universe is me). Even after that discovery they often don't separate empathic simulation of other's emotions from their own - if someone else is angry or sad they are angry or sad.
A later trick that we often fail to master as adults is the cause-effect relationship with emotions. When we're hungry we are more likely to snap at others or be rude. When we're stressed about something we're more likely to start fights/arguments. After a tasty meal, a piece of good news, or even intimacy we are more likely to be agreeable. When questioned in the moment both kids and adults will strongly attribute these feelings to the actions of others or simply fabricate a reason on the spot, completely failing to identify the true source of the feeling.
(Pedantic note: emotional states are much more complex than I can describe here so we can obviously come up with counter-examples from specific situations. This also doesn't account for personality disorders, eg narcissism).
