Financial markets may be entering a more fragile phase as Mohamed El-Erian warns that the long-standing policy put investors relied on after major selloffs is losing force.
The Allianz chief economic adviser and chair of Gramercy Funds Management argued in a Financial Times opinion piece that investors have grown accustomed to central banks and governments stepping in when markets fall sharply. That assumption, he said, is now harder to defend as inflation remains elevated, interest rates stay high and public debt constrains fiscal action.
The warning comes as stocks keep reaching fresh highs, powered largely by enthusiasm around artificial intelligence.
AI Gains Are Masking a Weaker Policy Backdrop
El-Erian said years of monetary and fiscal intervention changed investor behaviour, making market turbulence look less like a warning sign and more like an entry point.
“This has deeply conditioned market psychology, with many investors viewing volatility not as a signal of fundamental developments, but as a virtually automatic buying opportunity,” he wrote.
That mindset has helped shorten downturns. The source article pointed to the rebound after the Iran war began, even as the Strait of Hormuz remained effectively closed.
Investors have also continued to back AI-linked stocks, supported by large capital spending commitments from hyperscale technology companies. That strength has offset concerns about weaker real incomes, lower consumer confidence and higher energy prices.
El-Erian’s core point is that policymakers may still want to support markets, but their room to act has narrowed.
“While the willingness to shield markets may endure, the capacity to do so is less,” he said.
Inflation and Debt Are Changing the Rescue Playbook
The policy put became powerful because investors believed central banks could cut rates and governments could spend during crises. That formula looks more complicated now.
Several Federal Reserve officials have warned that inflation remains above the 2% target, raising the possibility of further rate increases if price pressures persist. Central banks in Japan and Europe have also faced renewed inflation concerns as higher energy costs move through the wider economy.
Fiscal policy is under similar strain. El-Erian said higher borrowing costs increase government interest bills while weaker growth can pressure tax revenues. That combination has revived concern about bond investors pushing back against rising deficits.
In the United States, weak demand at recent bond auctions has reflected investor unease over deficits, interest costs and plans for sharply higher defence spending.
The wider implication is clear: the next downturn may not bring the same rapid policy response markets became used to after the global financial crisis and pandemic-era shocks.
Investors May Need to Price More Uncertainty
For investors, the fading policy put means markets could become more sensitive to fundamentals. Earnings quality, balance-sheet strength, inflation exposure and financing costs may matter more if policymakers cannot quickly cushion every shock.
The pressure could be even greater in emerging markets, where weaker fiscal positions and lower currency reserves can increase the risk of capital flight. A stronger dollar or higher global yields would add another layer of stress.
El-Erian described the global economy as going through a “bumpy, structural recalibration.” He said policymakers should focus on AI-led productivity gains, deeper capital markets and stronger fiscal choices.
Those options are less immediate than rate cuts or emergency spending. That means investors may have to adjust to a period in which market declines last longer, volatility carries more information and official support arrives more slowly.
