Goldman Sachs issues caution on the speed of market recovery from August stock market decline.

• The rapid recovery of market confidence after a worldwide sell-off of risky assets should raise alarm, says the head of asset allocation research at Goldman Sachs.
• On Wednesday, Christian Mueller-Glissmann of Goldman Sachs spoke to CNBC's "Squawk Box Europe" and stated that investors should view the early August stock market decline as a "warning shot."
• Mueller-Glissmann stated that the current issue is the rapid return of the market to its previous state, which indicates that we are almost back to the same problem we faced a month ago.

The head of asset allocation research at warns that the rapid recovery of market confidence after a worldwide sell-off of risky assets should be viewed with caution.

On Wednesday, Christian Mueller-Glissmann of Goldman Sachs spoke to CNBC's "Squawk Box Europe" and stated that investors should view the early August stock market decline as a "warning shot."

The S&P 500 experienced its largest one-day loss since 2022 on Aug. 5, as stock markets began the month under pressure due to concerns over a U.S. recession and the unwinding of popular "carry trades" linked to the Japanese yen.

The S&P 500 has surged 8% since Aug. 5, and the Dow Jones Industrial Average has risen over 6%, fueled by anticipation of interest rate cuts from the Federal Reserve and positive U.S. economic data.

According to Mueller-Glissmann, during the initial period, sentiment and positioning were at the upper end of the range, and people were optimistic.

While you had a bullish outlook, the macroeconomic momentum was weaker, and we were concerned about a correction. You had negative U.S. macro surprises for 1.5 months before that, and Europe and China macro surprises also turned negative.

"The current issue is that the market has rapidly returned to its previous state, which we can discuss, but it highlights the fact that we are almost back to the same predicament we faced a month ago."

'A huge technical overreaction'

The release of the U.S. inflation report, specifically the Federal Reserve's preferred gauge of U.S. personal consumption expenditures data, is eagerly anticipated by market participants to gain insight into the health of the world's largest economy.

Expectations for a rate cut at the Federal Reserve's Sept. 18 meeting were boosted after Fed Chair Jerome Powell stated that "the time has come for policy to adjust." However, Powell did not provide specific details on the timing or extent of the cut.

What happened on Aug. 5 and around there was a huge technical overreaction, so that was a buying opportunity, according to Mueller-Glissmann.

The current challenge for market participants is that stocks and risky assets have "completely reversed" losses to return to their previous state.

Mueller-Glissmann stated that risk appetite has not returned to its previous level, and instead, safe assets such as bonds, gold, yen, and Swiss franc have not been sold off.

"While the S&P has returned to its previous level, the complacency that accompanied it is no longer present. We are not experiencing the same level of extreme bullish sentiment and positioning."

What's next for investors?

Mueller-Glissmann, who had previously recommended a 60/40 portfolio, observed that a balanced portfolio outperformed during a volatile month. However, he warned that the current bond market buffer may not be as dependable in the near future.

The bond market absorbed most of the decline, while the 60/40 portfolio experienced only a minor setback. The maximum drawdown for the U.S. or European balanced portfolio was around 2%. In essence, the bond market cushioned equity investments as we had hoped.

After this run, it may be prudent to exercise caution with your risk portion, given that you currently lack a significant buffer from bonds.

"Different methods exist for managing this situation, such as shortening it or developing alternative diversifiers, including liquid alternatives or option overlays."

— CNBC's Lisa Kailai Han & Brian Evans contributed to this report.