With the end of 2021 coming into focus, market commentators are beginning to share their expectations for what the fourth quarter may ultimately deliver in the global equity and fixed-income markets.

According to Nigel Green, CEO of the deVere Group, investors should brace themselves for a possible 10% market correction over the next month, driven by uncertainty about the U.S. Federal Reserve’s thinking on interest rates. This forecast comes as the Federal Reserve announced Wednesday that it will start unwinding its $120 billion monthly bond purchases later this month.

“While Fed Chair Jay Powell will be talking about the tapering of the massive bond-buying program, the real story for the markets is how the Fed, the world’s de facto central bank, will talk about inflation,” Green says. “Inflation is running hotter and is becoming a bigger issue than most analysts previously expected. As such, investors will be trying to get a handle on how the Fed intends to fight the trend of higher prices by starting to raise interest rates.”

Central bankers are slowly acknowledging that inflation may be stickier than expected. At the same time, the baseline view remains that inflation will settle back to historical norms over time, says Ryan Detrick, LPL Financial chief market strategist. While inflation has come down some recently, he expects there may be another swing higher in the fourth quarter or early next year as the post-COVID-19 reopening pushes prices higher in areas where the Delta variant had dampened economic activity. Examples in this category include airfares, lodging and used cars.

The consensus expectation of Bloomberg-surveyed economists is that Consumer Price Index (CPI) year-trailing inflation will fall to 3.3% by the end of 2022 and 2.3% at the end of 2023. Many consumers, though, are finding inflation risks scarier, because they’re sensitive to prices in grocery stores and at the gas pump—and because of heavy news coverage, Detrick says. In his view, the wild card remains how long it will take supply chain disruptions to sort themselves out, as they have been a key source of imbalances between supply and demand that have pushed prices higher.

“This means that [the Fed is] likely to have to raise interest rates sooner and/or more aggressively,” Green says. “Therefore, markets are actively pricing in two or three hikes next year, and this could lead to a 5% to 10% market adjustment over the next month.”

On the positive side, third-quarter earnings results have been good overall, Detrick says, adding that companies have generally done well managing through supply chain disruptions, labor and materials shortages—and the related cost pressures. A solid 82% of the roughly 280 S&P 500 companies that have reported earnings have exceeded their targets.

But there are reasons for concern, Detrick continues. Profit margins are well above their pre-pandemic highs and, in this sense, they carry increased downside risk in the near future. Additionally, labor is in short supply, with 10.4 million job openings, according to the Bureau of Labor Statistics (BLS), which is about 3 million more than pre-pandemic levels. This means employers are having to pay up for talent, and wage growth accelerated to 4.6% year-over-year in September. Unless the prevailing economic environment changes, wages will likely rise further—adding to the shortages of materials that have pushed prices up for manufacturers.

These pressures on companies’ costs could impair profit margins if they continue to build. Consumers and businesses can afford to pay higher prices now but may balk at some point, Detrick says. For now, strong revenue growth is overshadowing these margin pressures, he says, but with stock valuations elevated, it is important that earnings come through, or the markets may get spooked.