Bull market has legs into year-end and beyond, strategist says. Her top picks for 2022 - CNBC

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Stocks still have a chance of rallying into year-end, says strategist Mona Mahajan.

The major averages ended the week in the red Friday, weighed down by omicron fears, a weaker-than-expected November jobs report and concerns around the Federal Reserve's response to inflation.

However, the downside scenarios for the market's two biggest walls of worry — the path of the coronavirus and the path of the Fed — are starting to get priced in, Mahajan told CNBC's "Trading Nation" on Friday.

"There is more of a chance for an upside surprise versus downside surprise," said Mahajan, Edward Jones's senior investment strategist. "There is still a chance that we get the year-end rally, especially as investors start to look towards 2022."

Relatively strong consumer spending, higher balance sheet savings rates, strong corporate earnings growth in the U.S. and a rosy 2022 economic growth outlook all play into Mahajan's bull case.

"We still think markets can move forward, can move higher, perhaps not as high as we saw in the last three years, but in line with earnings growth and perhaps [with] a little bit more volatility," she said.

"Overall, the bull market still has some legs to go."

As for the Fed, Mahajan expected it to officially accelerate its tapering program at the upcoming December meeting, finish the effort by March of 2022, then pause and reassess inflation and labor trends before proceeding to interest rate hikes.

"We do think overall, inflation remains elevated, but we think we're heading towards a peak level sometime in the next few months. We do think inflation will come down, but just still remain above the Fed's 2% target," she said.

In the meantime, long-term investors shouldn't let market volatility derail their strategies, but should still take account of their portfolio diversification, Mahajan said.

"In the U.S., we see another kind of leg again for the value cyclical trade" if reopening trends re-emerge in the first half of 2022, she said, pointing to financials and industrials as her top picks in the group.

Defensive trades such as consumer staples, health care and utilities stocks could also play catch-up over time because of the underlying companies' ability to pass prices onto consumers, she said.

"Beyond the U.S., I think it is an interesting time to think about complimenting your U.S. portfolio, which has probably done quite well over the last three years, with some non-U.S. exposure," Mahajan added.

Improving vaccine trends, rising global growth rates and possible supply chain easing could help both emerging and developed international markets find their footing in 2022, she said.

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Bull market has legs into year-end and beyond, strategist says. Her top picks for 2022 - CNBC
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