Why this investor expects 'more normalized breadth in the market' during 2022

Aadil Zaman, Wall Street Alliance Group Partner joins Yahoo Finance to discuss markets slow start to 2022 and what to expect moving forward.

Video transcript

EMILY MCCORMICK: Aadil Zaman is Wallstreet Alliance Group partner, he joins us now. Aadil, I want to start with the moves that we've been seeing in tech stocks recently, and especially in big tech, with the NASDAQ composite down about 4% for the week. Now, you noted to us that 1/3 of S&P 500 returns or thereabout came from Apple, Alphabet, Microsoft, Nvidia, and Tesla last year but that breadth is likely to increase this year. But what does that mean for investors who are holding some of these major tech names?

AADIL ZAMAN: Great to be with you, Emily. Happy new year. So we think that tech is vulnerable over here because you know, if you look at the technology sector, it's gone up in a straight line. And now with this, especially with this report that came out today, with unemployment at about 3.9%, it is very evident that the Federal Reserve is going to continue with their tightening policy.

So I would like to differentiate between the hyper-growth technology companies, which we think are especially vulnerable here, we saw what happened to Peloton. But on the other hand, some of the high-quality technology companies that have fantastic earnings, we think that there would be some great opportunity in those in a pullback. So FAANG, Nvidia, Microsoft, we like those companies in a pullback because these companies have the earnings power to sustain continued appreciation in their stock prices.

ADAM SHAPIRO: When you talk about earnings power, you even point out that the second half of this year could be positive for US equities driven by continued earnings growth. So as just the average investor who's listening to us right now thinking, how am I going to make money this year? Is the message slow and steady wins the game, or do they need to be allocating as you said, to some of these perhaps other tech stocks that drove the S&P 500 last year but find the others this year to be in?

AADIL ZAMAN: Adam, the message is going to be that this is going to be a year of normalization. As Emily was saying, that there were five stocks last year accounted for about 1/3 of the return of the S&P 500. We don't think that's going to be the case this year. This year we are going to have a more normalized breadth in the market.

So we feel that there'll be greater sector participation. Industrials in our opinion will do well because of the infrastructure spend. Energy will do well as we go through global reopenings. Consumer staples and health care will be viewed as a safe haven in a volatile environment. And financials in our opinion will do well as interest rates go up. So the message for the average investor, and what we are doing for our clients at Wallstreet Alliance Group, is that rather than focusing on concentration, 2022 is the year to have more breadth in your portfolios and be well-diversified across all these sectors.

EMILY MCCORMICK: What are you hearing from your clients right now in terms of the biggest concern that they have for 2022? Because, of course, we're coming off a third consecutive year of double-digit gains for the S&P 500 last year. What are some of the big fears as you look ahead for the next 12 months?

AADIL ZAMAN: The biggest fear right now, Emily, in the market is the Federal Reserve. The Federal Reserve is going to be tightening and they don't have a choice. If you look at supply chain issues that are beginning to get resolved but inflation is still there. And the reason for that is that a lot of this inflation is demand-driven, driven by low unemployment, high consumer spending. And this inflation is extremely regressive, impacting low-income households the most due to increases in things like food prices, and energy prices, and rent prices.

So the big concern is really that the Federal Reserve is going to go in there and they're going to be doing the tightening. We feel that we are possibly looking at four rate hikes this year starting in March. And then after that, the Federal Reserve will probably start reducing the size of their balance sheet. So what that means for you and me and for people that are listening to the show, is that we are most likely going to get higher interest rates, more normal interest rates, not like the interest rates we've been used to. And with that, in our opinion would mean that equity markets will still do well because earnings are growing but the returns will get more normalized going forward.

ADAM SHAPIRO: Aadil, you brought up, Peloton. If you want to talk about the stock specifically feel free, but I'm going to ask you a question and help me as an investor, is my logic in the right frame of mind if I'm going to consider a stock like Peloton? We know that they went through great upheaval last year, hardware sales down dramatically. But membership subscriptions grew dramatically. The stock is up today about 5%. So if I'm looking at just that, that memberships actually grew at the point where we were recovering and hoping to go back to the office, would that be enough to determine, OK I'm willing to take a bet or a gamble on a stock like Peloton, betting that the earnings growth will also grow because of that new revenue from increased subscriptions?

AADIL ZAMAN: We think that we would stay away from these type of pure plays, stay-at-home plays. We feel that the trade really is not there. We do want to stick with the highest quality names. And we feel that right now we are going to be entering an environment and 2022 will mark the beginning of the end of the COVID-19 pandemic as we know it.

And because of that, we feel that as the Omicron fears subside, and we develop herd immunity and through medical advancements, we feel that we would look at more on the reopening side of the market. And we would be more inclined towards the higher quality reopening such as the energy sector where there's a structural issue where the supply is limited and there's a high amount of demand. We would gravitate towards those higher-quality areas of the market.

EMILY MCCORMICK: All right, we'll leave it there for now. Aadil Zaman, Wallstreet Alliance Group partner, thank you so much for your time and insight.