Good morning,
Finance chiefs haven’t felt this pessimistic since the pandemic raged in 2020.
The net optimism of CFOs for their own companies fell for the third quarter in a row, to -21, the lowest level since Q2 2020, and far below the two-year average of 25, according to Deloitte’s Q4 2022 CFO Signals report released this morning. (The own-company net optimism index is the percentage of CFOs citing rising optimism minus the percentage citing falling optimism.)
Looking further into the data, CFOs in the energy/resources industry are the most optimistic (+31), while health care/pharma CFOs are the least optimistic (-80). The drop in optimism is fueled by uncertainty over when inflation will top out, Fed rate hikes, and geopolitics, Steve Gallucci, the global and U.S. leader of Deloitte’s CFO Program, says. Talent churn and instability in the labor market also play into lower optimism, he says.
“When you take all of those together, that creates a level of uncertainty that we have not seen in recent times,” Gallucci says. “And that translates into less optimism about the company's prospects, and less appetite for risk.”
“We track a series of metrics around revenue, earnings, dividends, cap spending, domestic hiring, and domestic wages on each quarter,” Gallucci explains. “When you look at fourth quarter 2022 versus third quarter 2022 all those measures came down.”
The biggest declines were in year-over-year growth expectations for revenue and earnings at 4.2% and 2.9%, respectively, down from 6.2% and 6.4% in Q3.
CFOs named three top priorities going into 2023: cost management, financial performance, and growth (inorganic and organic).
The unstable supply chain over the past year translated into higher costs for a lot of the survey respondents, Gallucci says. “You're seeing that come through in the last couple of quarterly earnings for the major Dow components,” he says.
“So cost management going into 2023, with the continued uncertainty in respect to inflation, is going to be critical,” Gallucci says. “CFOs are spending more and more time with their leaders of the supply chain, understanding what are the drivers of costs, how can we try to stabilize some of this?” There will be some continued passing of those costs in prices to customers, he says.
Regarding growth, “There's going to continue to be investments made in new products and new services, investments to expand into new markets, mostly in North America,” Gallucci says. There will be M&A activity, although it’s “come down significantly in 2022,” he says. In the near term, “CFOs are not expecting that to raise the levels that we've seen in 2021 and prior,” he says. “But certainly, they’re going to continue to be opportunistic.”
Fifty-eight percent of CFOs surveyed would like the Biden Administration and Congress to first provide clarity or make changes to energy policies. Corporate income taxes (49%) came in second. The findings are based on a survey of 126 CFOs from the U.S., Canada, and Mexico, with the vast majority at companies with more than $1 billion in annual revenue.
When it comes to taxes, companies will face a new 1% excise tax on purchases of their own shares beginning in 2023, which is part of the Inflation Reduction Act. I asked Gallucci if that is a concern for CFOs.
He calls it a "factor...but not a major concern." They will consider it with respect to their capital allocation, he says. One of the questions on capital in the survey was, will you repurchase shares? he says. “We saw a pretty balanced response to that,” Gallucci says.
Inflation in the U.S. slowed again last month. Consumer prices rose 7.1% in November from a year ago, the Bureau of Labor Statistics said on Tuesday. That was down from 7.7% in October and a high of 9.1% in June. But today, the Fed is set to boost its benchmark rate for the seventh time this year. So CFOs are preparing for more uncertainty.
See you tomorrow.
Sheryl Estrada
sheryl.estrada@fortune.com
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