Is a stock market correction coming?

Zor Capital's managing director Joe Fahmy joined Yahoo Finance to preview what's happening

Video transcript

ADAM SHAPIRO: About 15 minutes to the closing bell. The S&P 500 is up roughly 12 points, almost at 4,200 once again. Already been there and done that, right? Well, one of the guests who called that the first week of April was Joe Fahmy. He's Zor Capital Managing Director, who said we would hit 4,200 on the S&P 500. Been there.

So what's next? Joe is going to help us answer that. But Joe, I just got to ask you-- and if you don't have an opinion, that's fine. The headline that affects many of us on this side, that our parent company is selling Yahoo Finance, Verizon Media Group. As you look at big tech companies and this rush for advertising dollar, I mean, you have the behemoths. You have Apple. You have Facebook. This new venture-- do we have a chance?

JOE FAHMY: I'm not an expert on media companies. But you're absolutely right, I mean, most of the ad are going to Facebook and to Alphabet. So obviously, companies are trying to be strategic to grab some of that market share.

- Well, let's talk about where you see markets headed. As Adam was mentioning, you were on our air. You were talking about new highs and the S&P 500 going to 4,200. Are you expecting a bit of a pullback? Is that what I'm sensing from you, Joe, with this latest call?

JOE FAHMY: Yeah, I would-- I'd say to sum up my stance right now is I'm still bullish longer-term, but just cautious over the short-term. Going back to the beginning of April, I was expecting a run in the markets for two main reasons, because April is traditionally a strong month and new money tends to flow in in the beginning of the quarter, and also to run up in anticipation of the earnings. So I'm glad that the indices got to my targets.

But beneath the surface, there was a lot of challenging price action, especially in growth stocks. You could see it in IWO, which is the Russell 2000 growth ETF. That really was pretty much flat on the month. So I'm thinking one of two things happens from here. Either growth stocks stabilize and lift the market higher or the weakness beneath the surface brings the market lower.

And I'm leaning towards the latter, for several reasons. The main one that I want to discuss is what happened over the last couple of weeks. So many mega cap tech stocks reported amazing phenomenal earnings. But as I like to say, it's not the news. It's the market's reaction to the news. And they were sold off, which was just telling me that the big institutions are selling into strength right now.

ADAM SHAPIRO: Joe, when we talk about where we're headed-- and you called it, the 4,200. But you also talk about giving back the April gains over the next two months. So for the investors watching right now, you're not actually bearish. But it sounds to me like we're going to go sideways this summer. And if we pulled the expectations for earnings forward, I'm thinking no one got poor taking profits early. Maybe that's time to do that and wait even longer than the end of the summer.

JOE FAHMY: Yeah, that's a great point. I think people should make decisions based on their time frame, based on their investment objectives. Just statistically, if roughly the S&P averages 10% a year and we're up over 11% so far this year, it wouldn't make-- it wouldn't hurt somebody when we're overpaced to take a little bit of profits. I also think that coming into a couple of other factors is tax season was extended. The tax deadline was extended till May 17 this year. But because 2020 was a strong year, you might see some people selling ahead of that to raise money to pay their tax bill.

So again, the backdrop, though, if you have a longer-term time frame is the economy is continuing to slowly get back to normal, and earnings are continuing to pick up. And the most important thing is that Fed backdrop continues to be very favorable for equities longer-term. I don't think there's any sign of them raising rates anytime soon, nor tapering their bond purchases. So as long as we have that equity-friendly backdrop, I could see, longer-term, the market's still-- the overall picture intact.

- Well, we have about a minute left. But you mentioned this favorable backdrop from the Fed for the equity markets. We've been talking a lot about inflation. How does that kind of fit into your view? How are you thinking about inflation? Does it even matter?

JOE FAHMY: Yeah, I don't know what the Fed measures inflation on, because they say there's no inflation except in everything we spend money on. So I don't know what they're measuring it on. But one thing I will say about the 10-year yield is that assuming the economy gets back to normal, it would make sense for the 10-year yield to get back to where it was, let's say, in January of 2020. So that would mean somewhere around 1.8% or 2%, which is still traditionally low.

However, that could keep pressure on tech stocks-- tech stock multiples. As the 10-year goes up, there's a correlation with multiples of tech stocks coming down. So that's another reason. Again, just cautious over the near-term, but still bullish over the long-term.