T.Rowe Price’s Australian equities chief says there’s now a “very real” prospect of a 5-10% market correction before year-end.

In his latest research note, Randal Jenneke dialled in on some key trends that emerged in August reporting season.

While FY21 was a big year for earnings and dividends, markets are always forward looking — and Jenneke said FY22 looks less rosy.

He partly attributed the uncertainty to fact that FY21 reporting season took place in the middle of the east coast lockdowns.

But when ASX CEOs got their binoculars out, the ratio of earnings downgrades to upgrades was around 2:1.

And importantly, that marked a material shift from the outlook at December 31 half-year results, which was “one of the best from an earnings vs upgrades perspective in decades,” Jenneke said.

Over the coming months, he’ll be watching for the next round of trading updates as AGM (annual general meeting) season approaches, along with pre-Christmas broker conferences.

And T.Rowe Price says investors might be left disappointed.

“Earnings downgrade cycles come in waves…only the first one has broken!” Jenneke said.

If companies do struggle to maintain their post-COVID growth rates, it will take place in an environment where policy stimulus is also starting to fade.

This week, the US Fed confirmed plans to start tapering its asset purchase program, while the odds of a 2022 rate hike also increased.

It marked the continuation of a key 2021 trend, where timeline expectations for the Fed’s first rate hike and consistently moved forward from its initial post-COVID estimate (2024).

Jenneke said the fallout from those tighter liquidity settings can already be seen in indicators such as the Credit Pulse.

Broadly defined as the change in new credit issued as a percentage of GDP, Jenneke said the credit impulse of the world’s three largest economies is “already negative”.

In that environment, Jenneke hs shifted the T.Rowe Price portfolio to defensive quality sectors (such as healthcare), which can track steadily in an environment of higher liquidity and lower earnings growth.

“This view is rapidly becoming consensus but isn’t quite there yet,” Jenneke said.

“We still believe there is the very real prospect of a 5-10% market correction before the year is out.”

So far this week, markets have largely been able to shrug off any scares (mainly from Evergrande).

But T.Rowe Price isn’t the only investment group to sound off on the prospect of a downturn.

Analysts at Morgan Stanley recently went on record to flag a possible 20% drop in the S&P500.