Investors have wrongly priced in an “orderly” withdrawal of stimulus measures, a rebound in bank lending and coordinated government policy to restore growth, the chief executive officer of Pacific Investment Management Co. wrote in a Bloomberg News column. That means Wall Street projections for gains in 2010 may prove incorrect and prices will slump, he said.

“Investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes,” El-Erian, 51, wrote. “The global financial crisis has undermined growth and job creation; it has clogged many of the pipes that allocate funds to productive uses; and it has rapidly taken public debt and the budget deficit to worrisome levels.”

The Standard & Poor’s 500 Index fell 3.7 percent in January, more than any month since February 2009, after China set higher reserves for lenders and U.S. President Barack Obama proposed curbs on risk taking at banks. The retreat pared the S&P 500’s gain since sinking to a 12-year low in March to 59 percent. The MSCI Emerging Markets Index lost 5.7 percent last month, also the biggest decrease since February.

‘Sugar High’

The benchmark index for U.S. equities traded for more than 24 times annual income at the end of 2009, the most since 2002, according to data compiled by Bloomberg. The ratio slipped to 19 times profits as 77 percent of S&P 500 companies earned more in the fourth quarter than analysts predicted.

“Judging from market valuations, I sense quite a gap between consensus market expectations and key political and economic realities, especially in the U.S.,” he wrote.

El-Erian, whose firm manages $1 trillion from Newport Beach, California, said in a July 29 interview on CNBC that the rally in U.S. equities was a “sugar high” that wouldn’t be sustained by economic growth. The S&P 500 has climbed 13 percent since then. On Oct. 10, 2008, he said the “point of exhaustion” for the credit crisis was “far away.” The S&P 500 decreased 25 percent through March 9, falling in four of five months.

The 13 Wall Street strategists tracked by Bloomberg News project that the S&P 500 will rise 10 percent in 2010, according to the average estimate. The average year-end forecast of 1,232 represents an advance of 12 percent from yesterday’s close of 1,103.32.

New Normal

Pimco’s Bill Gross and El-Erian say investors should expect returns that trail the historical average because of more government regulation, lower consumption and a smaller role for the U.S. in the global economy. American gross domestic product may expand 2.7 percent in 2010 and 2.9 percent in 2011 as demand recovers from the first global recession since World War II, based on the median economist forecast from a Bloomberg survey.

U.S. equities returned 6 percent a year on average since 1900, according to inflation-adjusted data compiled by the London Business School and Zurich-based Credit Suisse Group AG in a February 2009 report.

The U.S. government’s budget deficit in the fiscal year that ended Sept. 30 was a record $1.42 trillion. El-Erian wrote that too many market participants assume the U.S. will pass “pro-growth medium-term fiscal adjustment programs” and that the integrity of public institutions will be maintained.

“A more realistic assessment of these factors would caution against an excessive focus on changes in growth rates at a time when absolute levels are horribly out of whack,” he wrote. “The longer this is delayed, the greater the scope for policy mishaps and market disappointments.”