The stock market could get buffeted by headwinds including the Fed-market rift on rates and credit-related risks, analyst says

• The stock market could get buffeted by headwinds in the coming weeks but any volatility will be short-term, BNY Mellon's Alicia Levine said.
• The Fed-versus-market rift on interest rates, credit-related risks, and liquidity issues created by the debt-ceiling standoff could unsettle markets, according to her.

The US stock market could get buffeted by headwinds in the coming weeks but any volatility will likely be short-term, according to BNY Mellon's head of equities.

Alicia Levine told CNBC on Wednesday that equities are facing "a difficult environment" for three reasons: the apparent rift between the Federal Reserve and the market on where interest rates are headed, credit-related risks, and liquidity issues that may arise once the US debt-ceiling issue is resolved.

Levine is concerned about the disparity between what the Fed is signaling on rates and how the market is pricing the outlook for the same. The central bank raised borrowing costs for the 10th time in a row this month - and while officials signaled a possible pause in rate hikes, they haven't suggested that outright cuts are on the way.

Money markets, however, are pointing at lower rates by year-end.

The second risk, according to her, involves the possibility of some credit-related stress that could weigh on markets. Fears of a credit squeeze have been on the rise, with banks tightening lending standards following the failures of multiple US lenders the past months.

"In the event that there is some sort of credit event – let's call it 10% – that something really bad out there could happen because it is a Fed tightening cycle, then of course equities are still going to have a problem even if the Fed cuts," Levine said.

She also noted the liquidity issues that may arise once a settlement is reached between US lawmakers over the debt ceiling, as is widely expected. Analysts are expecting that the Treasury Department will have to replenish its cash by issuing billions of dollars in T-bills. That could drain liquidity out of financial markets in a short period of time.

"We are assuming the debt ceiling gets signed. But when that happens, the Treasury issuance and the T-bill issuance from Treasury could cause a little bit of volatility," she said.

But Levine assured the market could be "fine" by year-end, and rally further.

Even if all three factors come together, she said the resulting volatility would only be for the short-term - given the economy continues to be resilient and inflation has cooled significantly, falling to 4.9% in April from last year's peak of 9.1%.

"The bottom line is - the economy has been great. The data has held up better than expected … If the data goes in the right way the Fed of course could pause, but even if they pause, that pause is still not a cut and it's still higher than where the market is pricing at the end of the year," she added.