The strategists said layoffs are starting to happen, “and, given margin pressures, they are likely to accelerate.

“In the backdrop of these negative developments, markets have been fairly resilient and, in many segments, moved significantly higher this year. Does that mean that recession was priced in, positioning was sufficiently low, or something else?”

The strategists said the rally both in US and European equities has been driven by “likely misplaced optimism” and a decision by many fundamental investors to cover their short positions, or close bets that stocks will fall further, despite a negative fundamental outlook.

“However, we think all of those drivers are running out of steam, and markets that are heading towards recession are being further aggravated by central bank tightening. We think that recession is currently not priced in equity markets.

“We do not agree with the argument that because a recession is consensus (although more and more believe in soft landing), the market and economic outcome have to be better (e.g. one out of consensus scenario is a much more severe recession, or one that strikes much sooner than consensus expects).

“After [an] about 20 per cent rally since last fall, this would strongly suggest that a recession is currently not priced in. Keep in mind that over that year we had unprecedented global monetary tightening, energy crisis, inflation crisis, geopolitical crises, decline in earnings and significant increase of recession probability.

“Europe is particularly puzzling as it is trading as if the energy crisis, war and geopolitical crisis (which is likely to escalate in our view), and sharp monetary tightening did not happen at all.”

In terms of their model asset allocation, the strategists said they are reducing their exposure to equities broadly and to the eurozone regionally, reducing their exposure to credit. The moves reflect what they call “recent” outperformance.

“We remain overweight commodities, focused on energy, given tailwinds from China reopening, expectations for OPEC+ production cuts in the February meeting and for the US to start replenishing its [strategic] reserves this quarter, and since oil was the least reactive asset to the recent market optimism around a ‘soft landing’ scenario.

“We stay overweight emerging markets and China equities as there is little sign of positions becoming extended, while an earlier reopening from COVID restrictions should provide impetus for a sharper pickup in China growth from February onward.”