Equity and bond markets kicked off 2023 with strong bullish sentiment. Investors embraced signs of easing inflation and a loosening labor market as a pathway to a soft landing. Expectations centered on smaller rate hikes with an end in sight. We caution that the Fed has never ended a rate hiking cycle with a negative real fed funds rate. A recession is still likely, if not at least a period of substantial downward pressure on earnings, as monetary policy remains tight with inflation still well above the Fed’s target.