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Both stocks and bonds looked expensive after rallying together and were now vulnerable to a quick sell-off, Goldman Sachs said.
The market had increasingly treated the risks from the U.K. vote to exit the European Union (EU) as a negative local economic growth shock, affecting mainly Britain and Europe, but one that was likely to drive global central banks to ease further, Goldman said in a note on Monday.
That's driven yield-chasing fund flows back into both stocks and bonds, it noted, increasing the risks of a quick reversal.
"Markets have become very dovish relative to what central banks might deliver and against the current macro backdrop," it said. "Bonds could sell off sharply as a result of central bank disappointment, positive inflation and data surprises and/or illiquidity, which would likely drive weakness in equities and other risky assets, at least initially."
At the same time, "equities could sell off owing to negative growth surprises and with yields at all-time lows, bonds are unlikely to be good hedges. This leads to a lack of diversification and higher portfolio risk at a time when return potential is already limited."
That was one driver behind the investment bank's decision to go overweight cash in its allocation views, recommending that investors hold a diversified portfolio of currencies. It also advised holding some gold to reduce portfolio risk.
"We remain defensive in our asset allocation and believe the positioning-driven recovery of risky assets, in particular for equities, post-Brexit is likely to fade," it said.
Goldman stuck with a neutral call on equities on both three- and 12-month outlooks, but added that if stocks rallied further, it would reduce risk in that segment.
The bank stayed underweight on government bonds on a 12-month view, but it upgraded them to neutral on a three-month view.
"While expectations for central bank easing are now high, downside to bonds appears limited near term," Goldman said.
It expected equities would remain stuck in a "fat and flat" range, offering little in the way of returns, but suffering from high volatility.
But investors chasing yield globally spurred Goldman to keep its overweight call on credit, particularly riskier assets such as U.S. high-yield debt, emerging markets debt and European high-yield debt. But it cut its preference for European investment grade credit to neutral amid concerns over the impact of the Brexit.
Within equities, Goldman said it preferred defensive, low-volatility, stable growth companies.
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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter