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In the firm's CFO Signals survey, CFOs from more than 100 companies with revenue averaging $5 billion reported declining expectations in a variety of metrics, including earnings projections, sales growth, domestic hiring and capital spending.
The CFOs said they expect earnings growth to average 7.9 percent, which marked a notable decline from the 12.1 percent they forecast in the first quarter of 2013. Expectations also declined for sales growth (4.6 percent, compared with 5.4 percent) and capital spending increases (6.5 percent, versus 7.8 percent), while domestic hiring expectations were essentially flat.
"We're four years into a recovery that everybody seems to think is still around the corner," says Greg Dickinson, director of the CFO Signals survey. "As we go longer and longer into a recovery, we're seeing a gradual downward trend in expectations. People are getting used to the idea it may be like this for a while, and 2014 may not be the year when growth takes off again."
CFOs Respond
With cost-reduction measures of recent years providing diminishing returns, Dickinson says companies are exploring a broader range of options such as divestitures, M&A, share buy-backs and dividend increases.
"When you can't really grow the top line and you can't affect the bottom line by improving efficiency, the next frontier becomes focus," Dickinson says. "If you have business units that don't generate returns or aren't aligned with your core assets, you can look at selling them off or shutting them down."
In addition, a growing number of companies are hoping to expand their product portfolios or market share through mergers and acquisitions.
Share buy-backs and dividend increases are another common response among survey respondents, many of whose companies are sitting on historically large amounts of undeployed cash.
"There aren't a lot of places where these companies feel comfortable making large, long-term bets," Dickinson says. "When that happens, you see more shareholder activism, and companies are wary that they have to have a story about what they plan to do with that cash. Having cash gives you options and resiliency, but there's a side that says if you're not going to use the money, there's pressure to give it back to shareholders."
Overall Optimism
Despite the declining optimism, CFOs reported favorable views about overall economic conditions. In the survey, 72 percent of respondents view North American economic as improving or stable, compared with 60 percent in the fourth quarter of 2013. Respondents were also optimistic about growth in Europe (34 percent versus 23 percent in Q4), with their outlook for China remaining stable at 50 percent.
In past surveys, first-quarter results have tended to reflect the implicit optimism most companies carry into a new year. With many companies launching new initiatives and staring with fresh budgets, first-quarter survey results have previously shown higher optimism levels than the following quarters.
In general terms, this year's results reflect that trend. CFOs remain positive, but at lower first-quarter levels than have been recorded in the survey's four-year history. Overall, 47 percent of the CFOs expressed improved optimism, while 20 percent said their favorable outlook was declining. This "net optimism" gap of 27 points was lower than the 32 percentage points recorded in the year-ago quarter.
Overall, most companies have performed reasonably well since the depths of the 2008 downturn, due in part to practices such as effective capital management, matching inventory and staffing levels to customer demand, and increasing organizational flexibility to react to changing economic conditions.