Investing.com -- Goldman Sachs said equity returns are likely to moderate following a sharp rally but maintained an overweight stance on stocks over a 12-month horizon, telling investors they should buy any pullbacks in the coming months.

Analyst Christian Mueller-Glissmann wrote in a note to clients that markets have largely recovered from the initial shock of the Middle East conflict, with equities near all-time highs since mid-April, supported by strong technology earnings and AI capital expenditure growth.

However, elevated bond yields and energy prices present ongoing headwinds.

Goldman's Risk Appetite Indicator has risen above 1.2, its highest reading since 2021.

The firm cautioned that elevated sentiment increases the risk of corrections, particularly given concentrated positioning in global technology stocks.

"Very high RAI levels are not necessarily a bearish signal – near-term average returns and hit ratios for positive returns are somewhat lower and risk of corrections tends to pick up," Mueller-Glissmann wrote.

Near-term risks include renewed escalation in the Middle East and continued closure of the Strait of Hormuz, which Goldman said could keep upward pressure on oil prices and yields.

However, the firm's baseline assumes inflation normalization and a reopening of the strait, which could support a transition to a more favorable macroeconomic environment.

“After the sharp but narrow rally and with our Risk Appetite Indicator (RAI) back above 1, equity returns should moderate and there is more risk of corrections,” Mueller-Glissmann wrote.

"However, with our macro baseline and continued good earnings growth, boosted by AI capex spend, we remain OW equities for 12m and would look to buy any dips in the coming months.”

Goldman recommended selective risk mitigation strategies, including put spread collars and factor diversification, and expressed a preference for long-dated call options to manage equity exposure.