CFO Sentiments Rebound as Equity Markets Improve

Each quarter, Deloitte’s CFO Signals tracks the thinking and actions of CFOs representing many of Northern America’s largest and most influential companies.

Survey results from the second quarter of 2016 show a marked rebound of CFOs’ confidence in their companies’ longer-term prospects as equity markets improved substantially since the Q1 2016 survey. CFOs are significantly more optimistic, as the survey recorded a net optimism reading of +30.0, representing a sharp reversal from last quarter’s reading of +1.7. Additionally, four business outlook metrics — CFO’s expectations for growth in revenue, earnings, capital spending and domestic hiring — rebounded from multiple survey lows in Q1 2016, but the gains for some metrics were modest, and this was prior to the Brexit vote.

Likely in response to U.S. equity markets bouncing back strongly between Q1 and Q2, 56 percent of CFOs once again regard equity markets as overvalued. In terms of business focus, nearly 60 percent of CFOs say they are biased toward growing revenue over reducing costs (the highest level in more than a year), and 53 percent have a bias toward investing cash over returning it to shareholders.

Each quarter, we ask CFOs which risks they regard as most worrisome. This quarter, the top five external risks cited were oil/commodity prices; U.S. economy pullback; new/burdensome regulation; the upcoming election/political uncertainty in the U.S.; and global growth/recession/volatility and capital markets liquidity/stability. In line with these concerns, assessments of the North American economy are only slightly better than they were last quarter, with 40 percent of CFOs describing it as good or very good compared with 41 percent last quarter. In addition, even prior to the Brexit vote, CFO confidence in Europe remains weak with 6 percent of CFOs describing the economy as good. Perceptions of China’s economy also remain pessimistic with only 9 percent describing it as good or very good.

Last quarter, CFOs voiced very strong concerns about the impact of volatile equity markets and unfavorable economic news on financial market liquidity and customer demand. While it is encouraging that CFO’s sentiment regarding their companies’ prospects rose sharply this quarter, the survey’s net optimism measure is relative and not absolute, meaning that sentiment is a lot better than it was last quarter, but is not necessarily good compared to longer time frames.

As we approach the November elections, it will be interesting to see where candidates settle on important regulatory and policy issues, and how the discourse affects the sentiments and expectations of CFOs in upcoming surveys.

In addition to asking questions regarding CFOs’ business outlook, the survey also addresses challenges and solutions specific to finance organizations and CFOs. Following is a brief summary of some of these findings for the second quarter:

Finance operating models mostly delivering positive outcomes: CFOs’ assessments may not have been as positive as expected in terms of service quality and cost, talent retention and process standardization. There appear to be significant differences across industries and between centralized and decentralized models.

Broad direct and indirect functional responsibility: CFOs say nine functions report to them on a solid-line basis. Corporate finance, treasury, accounting, FP&A, and tax are the most common solid-line reports.

 

Greg Dickinson is Director, North American CFO Survey at Deloitte LLP.