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Goldman Sachs Downgrades Global Stocks as Rally Stalls

World stock markets have rallied to levels not seen since the collapse of Lehman Brothers, but the bull market has screeched to a halt and now one of the world's largest investment banks has downgraded its outlook for global equities.

Bull or Bear Market
Andrew Unangst | Photographer's Choice | Getty
Bull or Bear Market

The resolution of the "fiscal cliff" and the passing of a bill to extend the United States' debt limit in January had consolidated the risk-on trade in recent weeks, with the S&P 500 and Dow Jones Industrial Average both up over 6 percent in January.

But markets have been treading water in February and Goldman Sachs says that any risk that existed at the end of last year is now split between a number of different events.

"We think the equity market will need time to digest the recent gains," Goldman said in a research note, although its long-term view is still pro-risk.

"Asset prices have moved a long way and are now very close to our 3-months targets."

(Read More: Dow May Struggle to Outdo Itself as Caution Takes Hold)

Goldman Sachs says that the ongoing fiscal debate in the United States will have a bigger effect than previously anticipated.

"Due to the drag from fiscal contraction we only expect the U.S. to reach a trend-like level of growth by the fourth of quarter of 2013," it said, adding that Europe also still posed downside risks.

(Read More: Stock Rally Not Sucking Cash Out of Bonds: Gross)

"We believe that investors are now much more relaxed about European risks, and though we agree that risks have diminished, we are still far from a solution, and market focus on the remaining risks could flare up again," it said.

Any sell-off in equities is set to be short lived, according to Goldman Sachs, and it has downgraded its outlook from overweight to neutral for three months, but is still overweight over 12 months.

(Read More: Stocks Are the New Bonds: Goldman Sachs)

This update was accompanied by the bank also upgrading its prediction on global growth for this year from 3.1 percent in its 2012 forecast to 3.3 percent, and to accelerate further to 4.1 percent by 2014.

Goldman Sachs also reaffirmed its underweight stance on U.S. and German bonds, currently still yielding near record all-time lows.

By CNBC.com's Matt Clinch