According to Deloitte’s Q4/23 CFO Signals survey, CFOs who rated the current North American economy favorably plummeted 10 points since the previous quarter to 47% from 57%. Net optimism for CFOs’ own companies’ financial prospects also fell to +11 from +22 in the Q3/2323 survey. CFOs in the survey lowered their year-over-year growth expectations for revenue, dividends, earnings, capital investment and domestic hiring, but raised them for domestic wages/salaries.

The survey also found that slightly more than one-third (35%) of CFOs believe U.S. equities are overvalued, compared to 56% saying the same in Q3/23. CFOs further indicated inflation/interest rates/liquidity impact, macroeconomics and geopolitics are the the top-three factors that could most constrain their companies’ ability to achieve financial performance goals in the next 12 months.

Eighty percent of CFOs said they expect their companies to embed more automation/digital technologies into their operations in 2024, while 76% expect digital transformation and technologies to play a greater role in achieving their companies’ strategy. Meanwhile, 51% of CFOs estimated 1% to 10% of their companies’ growth in the next three years will come from M&A, while 19% indicated between 11% and 50% of growth could derive from M&A in that period.

In addition, 65% of CFOs said they expect their companies to offer a hybrid work arrangement in 2024.

Each quarter, Deloitte conducts its CFO Signals survey to track the thinking and actions of CFOs in North America. Participating CFOs represent large companies, with 81% of respondents reporting revenue in excess of $1 billion. Nearly one-quarter (24%) of CFOs are from companies with greater than $10 billion in annual revenue. The Q4/23 survey was conducted between Nov. 6, 2023, and Nov. 22, 2023. A total of 124 CFOs participated in the survey.

“At the cusp of 2024, CFOs expressed a far more conservative outlook than in the previous quarter’s CFO Signals survey, likely due to the continued impact of high interest rates, inflation and tensions caused by geopolitical conflict,” Steve Gallucci, national managing partner of the U.S. CFO program at Deloitte and global leader of Deloitte Touche Tohmatsu Limited, said. “However, their concerns are contrasted by signals that the new year will bring greater M&A activity, as well as investments in digital technologies both for strategic and operational purposes, indicating there may be a light at the end of the tunnel.”

Economic Outlook

CFO sentiment toward current economic conditions in North America, Europe, China and South America fell in the Q4/23 survey. In contrast, CFOs upped their views toward current economic conditions in Asia excluding China, with 28% of CFOs considering current conditions as good, an increase from 24% in Q3/23.

Slightly under half (47%) of CFOs rated the current economy In North America as good or very good, a notable decrease from 57% in 3Q23. Just 9% of CFOs noted current economic conditions in Europe as good or very good, a dip from 11% in Q3/23. Meanwhile, 3% of respondents described China’s current economy as good or very good, down from 8% in the prior quarter’s survey. Finally, 8% of CFOs considered South America’s current economy as good or very good, down slightly from 9% in Q3/23.

A similar downward trend can be seen in CFOs’ outlook for regional economies 12 months out. For example, 37% of CFOs said they expect economic conditions in North America to improve, a drop from 46% in the previous quarter. Only 16% of CFOs expect conditions in Europe’s economy to improve in a year, down from 29% in Q3/23. Twelve percent of surveyed CFOs anticipate better economic conditions in China in a year, down from 20% the previous quarter. CFOs’ 12-month outlook for other economies in Asia excluding China dipped slightly, with 26% anticipating better conditions vs. 27% in the previous quarter.

There were some signs of optimism for South America’s economy, with 18% of CFOs expecting conditions to improve in the year ahead, up from 9% in Q3/23.

Own-Company Optimism and Risk

The percentage of CFOs expressing optimism for their companies’ financial prospects decreased to 38% from 41% in the prior quarter, while those expressing pessimism rose to 27% from 19% in Q3/23. As a result, CFOs’ net optimism fell to +11 from +22. In line with this fall in optimism, the proportion of CFOs who believe now is a good time to take greater risks (38%) was outweighed by those who said now is not a good time to do so (62%). The gap may be influenced by what CFOs see as the top three constraints on their companies’ ability to achieve their financial performance goals in the next 12 months: inflation/interest rates/liquidity impact, macroeconomics and geopolitics.

Key Operating Metrics

In Q4/23, CFOs lowered their year-over-year growth expectations from Q3/23 levels across five of six operating metrics tracked by the survey. Growth expectations for revenue dropped to 5.1% from 5.5%, while expectations for growth in earnings decreased to 6.8% from 8.3%. CFOs’ expectations for growth in dividends dipped to 2.6% from 2.8%, and their growth expectations for capital investment fell to 6% from 6.3%. CFOs’ expectations for growth in domestic hiring fell to 1.6% from 1.8%; in contrast, they raised their expectations for domestic wages and salaries to 3.8% from 3.6%.

Expectations for 2024

Concerning company strategy, more than three-quarters (76%) of CFOs expect digital transformation and technologies to play a greater role in 2024. In fact, 80% of CFOs expect their organizations to embed more automation/digital technologies into their operations in the coming year.

Nearly half (48%) plan to increase their focus on new markets inside North America vs. the 30% who indicated their focus will be on new markets outside the region. Slightly more than one-quarter (26%) of CFOs said inflation will affect costs to the same degree in 2024 as it did in 2023, and half of CFOs expect their companies to raise prices for a substantial portion of their products/services to offset it.

Regarding capital, 67% of surveyed CFOs indicate they will allocate or reallocate capital to new business investments even though 62% of CFOs believe now is not a good time to take on greater risks.

More than three-quarters (76%) of surveyed CFOs expect cybersecurity to be a top priority for the audit committee over the next 12 months, beyond financial reporting and internal controls, and indicated enterprise risk management (43%) and finance and internal audit (40%) as the next top priorities for the audit committee in 2024.

As many return to work after the holidays, some may wonder: Where will work take place as the year unfolds? Sixty-five percent of surveyed CFOs said they expect their companies to offer a hybrid work arrangement in 2024.

2024 M&A Strategy

Of the surveyed CFOs planning to pursue M&A and joint venture opportunities (JV), 57% said increasing competitive positioning and/or capturing sector and market leadership best describe their companies’ top M&A strategy. Strengthening a core business or raising capital follow was cited by 34% of CFOs.

Slightly more than one-third (34%) of CFOs expect their companies to increase the average number of deals they close over the next 12 months, while just 13% expect a decline over the same period. Almost half (46%) do not expect any change, with 7% indicating they did not know/were unsure.

Looking further out, more than half (51%) of surveyed CFOs project M&A to account for 1% to 10% of their companies’ growth in the next three years, and 19% of CFOs expect between 11% and 50% of their companies’ growth to derive from M&A in that period.

Almost half (49%) of surveyed CFOs indicated they will likely use cash to finance their deals in the next year, while 30% expect to use alternate structures, such as JVs and strategic partnerships.

Nearly three-quarters (71%) of surveyed CFOs said that the valuation of assets/widening bid-ask spreads was among their companies’ top-three challenges to M&A or deal success. Integration/divestiture (36%) and the status of debt markets (30%) round out the top three most-often cited responses.

“Surveyed CFOs are looking to deploy capital via M&A as a growth lever in 2024. This finding aligns with the results of our recent ‘2024 M&A Trend Survey: Mind the Gap.’ Should the Federal Reserve come through on expectations for reduced interest rates, that, coupled with some strategic pivots, could potentially spur more deal-making,” Adam Reilly, national managing partner for mergers, acquisitions and restructuring services at Deloitte & Touche, said.

Assessment of Capital Markets

More than one-third of surveyed CFOs (35%) consider U.S. equities overvalued this quarter, a substantial decrease from 56% in Q3/23. Nearly one-quarter (23%) of respondent’s regarded U.S. equities as undervalued, a notable increase from the previous quarter’s 9%.

CFOs’ enthusiasm for debt and equity financing dropped again in Q4/23, likely due to the continued impact of high interest rates. Ten percent of CFOs found debt financing attractive, down from the previous two quarters’ 16%, while 19% considered equity financing attractive, a decrease from the previous quarter’s 29%.