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CFO survey shows growing concern about earnings, revenue, hiring and CapEx

Aaron Task
Editor in Chief

American CFO's are worried, according to Deloitte's second quarter 'CFO Signals' survey. While fairly upbeat about the U.S. economy, the Chief Financial Officers surveyed by Deloitte are particularly worried about earnings and revenue growth, concerned about cyber security and overall less positive than anytime since the third quarter of 2013.

Three factors are driving the skepticism, according to Sanford Cockrell III, global leader of Deloitte's CFO program and a national managing partner at the firm: concerns about rising interest rates, a potential slowdown in the U.S. economy, and 'macro' worries about the global economy. Notably, the survey was conducted in late May, before the China stock market meltdown and fears of 'Grexit' rattled global markets, albeit briefly.

"It would be interesting if we asked the same questions today around the global economy, [the answers] would shift," Cockrell says, noting CFOs are particularly downbeat on the European economy, with only 5% viewing it as "good" and only 30% expecting it to improve much in the next year.

But the "aha moment" in the survey, according to Cockrell, is the combination of big declines in expectations for earnings and revenue, both to the lowest level in the survey's 5-year history. That, in turn, is leading to what he calls "anemic" hiring expectations and "not great" forecasts for capital spending in the coming year.  

CFOs are "quite concerned about growth cycles over the next six months to a year," Cockrell says. Just 38% of CFOs express rising optimism, down sharply from last quarter’s 48% and the lowest seen in more than two years.

In addition, the survey found 65% of CFOs believe the U.S. stock market is "overvalued," up from 46% in the prior quarter.

One caveat to taking a bearish view from all this is that because CFOs are concerned about interest rates rising, they may be more inclined to do deals now, when financing is so cheap. U.S. merger activity was up 60% vs. a year ago in the first half of 2015 and the average deal valuation was a record 16 times EBITDA, according to The Financial Times.

It's hard to be wildly bearish against that backdrop of stock being removed from the market at premium prices. But it's hard to be a raging bull given how concerned CFOs are becoming. All sum, this might be a recipe for more sideways action.

Some specific findings from the survey:

  • Earnings expectations declined sharply to 6.5% from 10.6% last quarter, the lowest in the survey’s five-year history, contributing to CFOs growing concerns about the longer-term health of the US economy.
  •  Revenue growth expectations fell to 3.1% from 5.4% last quarter and now sit at the lowest level recorded in the survey.  
  •  Domestic hiring expectations fell to 1.2% from 2.4% in Q1, and are now at their lowest level since the first quarter of 2014.
  •  Almost 97% of surveyed CFOs consider cyber attacks to be a major threat. Nearly 25% of them feel insufficiently prepared for such crises, and only 10% say they are well-prepared.

Aaron Task is Editor-at-Large of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at atask@yahoo-inc.com.