- Mohamed El-Erian said stocks have been resilient despite economic uncertainty.
- The US may face a debt ceiling crisis, more interest rates hikes, and tightening credit conditions.
The stock market has remained remarkably resilient even as the US economy faces major uncertainties, Mohamed El-Erian said.
The veteran economist has been "very impressed by how stable" markets have been recently. The S&P 500 earlier this month briefly hit 4,200 for the first time since August and is up 9% year to date.
"There are three big uncertainties: The debt saga; whether the Fed has got to hike, pause, or skip at its next meeting; and, of course, what's happening to credit," El-Erian told CNBC on Tuesday.
The S&P 500 has been supported by "all weather names," or stocks in the index that have been able "to generate revenues almost regardless of what's happening in the broader economy." This includes companies that are benefiting from the artificial intelligence frenzy, according to El-Erian.
"There's a lot of good things happening in the US economy. The labor market remains strong," he said. "There's a lot of entrepreneurial activities going on. There is reason to be positive about productivity gains."
He added: "If we can just stop shooting ourselves in the foot, there is a runway for a bumpy journey to a better destination. We just have to stop shooting ourselves in the foot."
Investors are navigating the Fed's monetary tightening campaign as well. The central bank has raised borrowing costs 10 consecutive times since March 2022 in a bid to combat high inflation. Policymakers will convene again for another two-day meeting in June to discuss the Fed's next move.
El-Erian, known as an outspoken critic of the monetary authority, points to the Fed as the dilemma that's "the most difficult" to resolve.
"This is a Fed that has been inconsistent. It has made mistakes in its analysis and its forecasts and its communication and supervision," El-Erian, the chief economic adviser at Allianz, said.
Second, there are continued concerns around credit following tremors in the banking sector. A slew of major financial institutions like Silicon Valley Bank, First Republic Bank, and Signature Bank all failed this year.
Credit conditions could tighten as a result of customers pulling back deposits, which could make it more difficult for businesses to take out loans — and in turn slow economic activity.
Finally, President Joe Biden and House Speaker Kevin McCarthy have yet to reach a deal that would raise the government's $31.4 trillion debt ceiling. The parties must reach an agreement by early June, or else the Treasury will run out of funds, forcing it to stop certain payments like salaries for government employees and debt-service expenses.
There could be a huge sell-off if lawmakers don't come to an agreement and the US defaults. If this happens, UBS forecasts that the S&P 500 could decline by at least 20%.
"The only people who benefit from this debt ceiling saga are the adversaries of the United States. We are sending a very negative signal about our ability to run our economy, let alone be an anchor for the rest of the world," El-Erian said.