Low interest rates, which have been pushing investors towards shares for the income they provide through dividends, have been a major contributor to the rally.
"With valuations high - especially in the high yield sectors that have driven this performance - the market will be more sensitive to bad news, and particularly any shift in inflation or interest rate expectations," Craigs said in a note.
"We believe it is time for existing investors to take some profits."
Mark Lister, head of private wealth research at Craigs, said a shift in market expectations around the outlook for inflation was a risk worth considering.
"While we still think inflation will be flat as a pancake in the short-term, it really comes down to people's perceptions of further out," he said.
"All it would take is a bit of a shift in inflation expectations, which could see the world decide that all of these high dividend yield [equity] stories are not the place to be."
Lister said other risks included the possibility of a December interest rate hike from the US Federal Reserve and the outcome of next month's presidential election in the United States.
"If you've been in the New Zealand sharemarket for the past one, two or five years you're sitting on these massive gains," he said.
"[Our view] is not necessarily about going cold on the sharemarket ... it's just saying, 'Take some profits'."
Harbour Asset Management managing director Andrew Bascand said Craigs' views were "generally logical".
"We have published similar sentiment recently and our growth portfolios have tilted away from yield [towards growth stocks] and we have some cash in our portfolios as well," he said.
Bascand said equity markets were "potentially vulnerable" to a sudden change in sentiment, which could result from a range of factors including the US election, an upcoming Italian referendum on constitutional reform and US interest rates.
"It's really difficult to get the timing right in these strategic [asset allocation] moves," he added.
