(Bloomberg) -- Skyrocketing fuel costs are one of the forces threatening to upend the stock market as policymakers try to navigate the US economy to a soft landing, according to Pimco’s Erin Browne.

Equity investors are failing to factor in the chances of a recession while hazards, such as higher oil prices, could drive the S&P 500 Index down roughly 15%, the portfolio manager for multi-asset strategies at Pacific Investment Management Co. said in an interview.

“Oil is one of the biggest challenges for the Fed,” Browne said. While the policymakers are focused on core inflation — which excludes volatile inputs like food and energy — higher oil prices will move durable good prices higher and hurt the economy, making it “difficult for the Fed to meet the market expectations of three rate cuts next year.”

Browne joins a number of Wall Street prognosticators who have had to dial back expectations for a recession in 2023 amid better-than-expected economic growth. “The consumer proved to be more resilient than expected as did aggregate GDP growth, which pushed back and softened our expectation of a recession,” she said. 

Read more: Wall Street Comes to Grips With How Wrong It’s Been in 2023

The portfolio manager now expects a softish landing — characterized by very low gross domestic product growth but still elevated inflation – but says the economy remains vulnerable to outside shocks.

The disconnect between the economy and earnings growth has been especially concerning for market observers. The swaps market currently predicts about three rate cuts in 2024, an indication that the economy is supposed to weaken. At the same time, equity analysts remain bullish predicting stronger earnings, countering the calls for an economic slump. Consensus implies US equities will grow about 12% on a share-weighted basis in 2024 versus 2023, according to Bloomberg Intelligence calculations.

To Pimco, one of the reasons behind this divergence is that companies have not yet indicated that they’ve seen any real slowing in their sales. And with inflation coming down, as it’s expected to continue to do into 2024, that would help margins. 

On top of that, Browne expects some of the more consumer-oriented sectors and semiconductor companies to refill their inventories in 2024 which can also be an indicator of stronger demand for goods and lead to a robust earnings trajectory. 

While consensus is now for a soft landing, if a US recession materializes, Browne expects consumer staples and underperforming defensive sectors — such as health care — to outperform. On the flip side, more cyclical-oriented sectors like home builders, industrials, consumer cyclicals like airline transportation, lodging and restaurants would underperform.

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