Stock Market Has Gotten 'Overly Optimistic': El-Erian

The stock market has gotten ahead of reality, Pimco's Mohamed El-Erian told CNBC Friday.

Photo: Oliver P. Quillia for CNBC.com Mohamed El-Erian, co-chief executive officer of Pacific Investment Management Co.

In a continuation of recent comments, El-Erian, co-chief executive officer of the largest bond fund manager in the world, said the US has yet to see a durable and sustainable recovery.

"Stock investors are making overly optimistic assumptions," El-Erian said. "The key stimulus has already come into the consumer and has helped in the last few months. But for the third and fourth quarters looking ahead, I am not so sure things will be as good."

Just three weeks ago, El-Erian told CNBC that the stock market spent July on a "sugar high," rising to levels not justified by an economy that is still limping along.

"More stimulus has made it into the economy that people realize," El-Erian said Friday. "Current valuations are not warranted by the outlook for 2010."

Asked about Treasury Secretary Timothy Geithner's comments this week that a significant amount of risk has been taken out of the system, El-Erian said other areas in the economy are still troublesome.

"He was talking about banking and that has been de-risked," said El-Erian. "But there are other areas, like commercial real estate that haven't been resolved yet when it comes to risk."

El-Erian also said that a gradual weakened US dollar would help a global economic recovery.

"A weaker dollar helps the US to produce more and for Asia to consume more," El-Erian said. "But it has to be a slow decline. Too fast and it will hurt rather than help."

As for France and Germany recovering quicker than the US out of their recessions, El-Erian pointed to two reasons. "They had more exposure to growth in Asia," said El-Erian. "Also, they didn't have as much debt to begin with."