Investors were given further reason for good cheer this week by reports that the US and China could be nearing a comprehensive trade deal. The negotiations could result in an agreement to lift most US tariffs, as long as China follows through on promises on market access and intellectual property protections, according to Bloomberg. That provided further impetus to Chinese stocks, which had already been lifted on Friday after news that index provider MSCI is quadrupling the weighting of the nation's onshore market. And global stocks are now just 3% from the all-time peak hit in September 2018.

We share much of the market optimism and remain overweight stocks. But with many potential market pitfalls remaining, we caution against over-exuberance.

* While US-China trade talks appear to be making progress, investors should remain alert to the potential for mishaps. President Trump recently said that talks could still end without substantial agreement. And even if a deal is agreed, we could see either side failing to implement the agreement fully – or being perceived by the other side as backsliding. Both the US and Chinese governments still appear wedded to a mercantilist view of trade.

* US inflation still requires careful monitoring. Futures markets now assume no further Fed rate hikes in this cycle, with the potential for rate cuts next year. Yet the Fed's favorite measure of inflation – the core Personal Consumption Expenditure index – is close to the Fed's 2% target. Further increases in coming months could compel the Fed to shift its rhetoric – a development that would likely precipitate a retreat in stocks.

* China is currently in both a cyclical and structural slowdown. So far the Chinese government has been successful in controlling the pace of the deceleration. But the margin for policy error is relatively small. And any mishap on US-China trade talks could make their task still harder.So despite the recent encouraging news, we believe investors should consider hedging overweight positions to stocks where they have this option. For further analysis please see our "Global risk radar: Late cycle musings."