(Bloomberg) -- JPMorgan Chase & Co. strategist Marko Kolanovic said he is “turning more defensive,” recommending that investors fade this year’s stock rally because “a recession is currently not priced into equity markets.”

Kolanovic, one of Wall Streets biggest optimists through much of last year’s market selloff before shifting his stance in recent months, reinforced the defensive tilt in the bank’s model portfolio this month by covering its government bond “underweight” and moving slightly “overweight,” while reducing risk across equities, credit and commodities.

Read more: Morgan Stanley’s Wilson Says Stocks Ignoring the Fed Reality 

“With equities trading near last summer’s highs and at above-average multiples, despite weakening earnings and the recent sharp move higher in interest rates, we maintain that markets are overpricing recent good news on inflation and are complacent of risks,” a team of strategists led by Kolanovic wrote on Monday. 

Kolanovic cautioned that a recession will “eventually be necessary” to bring inflation back to central-bank targets and said the potential upside for markets is likely “fairly limited,” given stretched valuations and high rates. He pointed to US industrials stocks and European equities, arguing that an economic downturn isn’t priced in since each group is basically unchanged over the past year.

Most of Kolanovic’s 2022 calls didn’t pan out. He has since reversed his view, cutting his equity allocation in mid-December due to a soft economic outlook for this year. In January, he said the economy was headed for a downturn, and the bank reduced its recommended equity allocation once again due to fears of a recession and central-bank overtightening. Last week, he said that the US economy’s disinflationary process could just be “transitory.”

Read more: BofA’s Subramanian Says S&P 500 to Remain in Bear Market

Kolanovic, however, did urge investors to buy the dip in China equities during their October downturn, a call he got right as the MSCI China Index has gained more than 20% since early October. He said the bank continues to tilt its portfolio to “benefit from tailwinds from China reopening,” with “overweights” in commodities, primarily via energy and emerging-market equities.

“We think that one should be using the ytd gains to cut equity allocations, and to reduce portfolio beta,” Kolanovic wrote. “We believe international equities (China/EM, Japan and Europe) offer better risk-reward than US equities.”

©2023 Bloomberg L.P.