Googling around this error happens with (many different email clients) and not just related to eM Client. As @Gary says it’s a Mail Server issue.
Many different forum peeps have reset their passwords many times in their account online in Outlook.com and removed and re-added their IMAP & Exchange accounts in different mailer clients (including Thunderbird) multiple times only to get this same error popping up time after time. Some might go for a little while as @beamer138 says but then stop receiving with the error again.
Many forum support peeps also say it is a MS Exchange issue with password relating back to (the server in some way), where for some reason Microsoft after the connection is established doesn’t think the password you entered is valid anymore even though it’s the correct password and the mail client just authenticated ok. See Google search quotes on this issue below.
Hopefully that above info @Paul23 advised about passwords might help @beamer138 where even a manual exchange setup didn’t work yet works for me & other users both ways with np in eM Client.
See below two quotes from Google searching this error with various different mail clients.
(Quote 1)
The message “User is authenticated but not connected” is due to a bug in the Exchange server’s IMAP implementation. If the client presents a valid user name but an invalid password, the server accepts the login, but subsequent commands fail with the aforementioned error message.
(Quote 2)
It seems to be a bug in Exchange’s IMAP implementation where the server continues “happily” along if the username is valid but the password is not (incorrect, expired, etc.)
Note: If Microsoft won’t fix the issue for customers with this issue, then I personally would look at eg: auto forwarding the Outlook.com email to another IMAP server mailbox like Gmail and setup eM Client for that account instead, and then setup an (Alias Outlook email address) in eM Client for sending & replying to emails etc.
If you did that option, you would export all your Outlook.com contacts online to a file and import them into Gmail after adding the Gmail account and just disable the Outlook.com account in eM Client (from checking mail) in Account settings. You could then (if you want) eg: drag all your Outlook emails to your Gmail account in same name folders in eM Client, to have it all in Gmail and just use Gmail from then.
You would also setup a “default sending email address” in your Gmail online account Settings “Send mail as” section so it matches eM Client. That way peeps still think you are sending from your Outlook email address in eM Client, even though it’s a Gmail account. I’ve done that before as well for some peeps who had problematic Outlook mailbox issues. This is done in combination with an Alias email address in eM Client. See 2nd screenshot below for how to setup and Alias eg: Outlook email address.
Send emails from a different address or alias - Gmail Help (google.com)
(Setup Alias email address in eM Client)