Despite being the longest lasting bull market in 30 years, National Bank Financial remains cautious on the Canadian stock market.

In a research note, NBF notes that the S&P/TSX index has had no major pullback — a decline of 10% or more) — since the current bull market began three and a half years ago. This is the longest such stretch in three decades, it says.

It also observes signs of increased investor taste for risk, including record inflows to emerging markets over the year-to-date and a stellar performance of small caps. “What explains this appetite? Among possible reasons are low inflation expectations and a growing investor conviction that the central banks can engineer an economic soft landing despite current global imbalances,” it suggests.

“This conviction and risk tolerance are likely to be tested in the coming months as the major central banks — Fed, ECB, BoJ — tighten in sync for the first time in years,” NBF cautions. “Our asset allocation remains accordingly prudent,” it adds.

“In U.S. equities we recommend a neutral position.” Its 12-month S&P 500 target is 1325 and the index is currently at about 1300. In Canadian equities it recommends underweighting. “Our 12-month target for the S&P/TSX is unchanged at 10,500,” it notes. The index is currently at around 12,200.

“In sector rotation, we are still very comfortable with our defensive stance. We remain cautious on financials and energy. We are more upbeat on countercyclical sectors like consumer staples and health care,” it counsels.