Deloitte's CFO Signals survey for the third quarter (Q3 2018) of chief financial officers, representing many of North America's largest and most influential companies, reveals that CFO optimism, while still strong, appears to be on the retreat. Concerns around trade policy and political uncertainty, combined with the continuing challenges to identify finance talent, appear to have dampened CFOs' outlooks.

In fact, the net optimism index regarding CFOs' own-company prospects declined for the second straight quarter after hitting a new high in Q1 2018. This quarter's net optimism declined to +36 from +39, reaching its lowest level since Q3 2017. CFOs expressing rising optimism remained unchanged from last quarter (48 percent), while 12 percent cited declining optimism, up from 9 percent last quarter.   

CFOs' perceptions of regional economies also fell. Eighty-nine percent of CFOs rated current conditions in North America as good, down from a survey high of 94 percent last quarter, and 45 percent expect better conditions in a year (down from 52 percent and the lowest in two years). Perceptions of Europe's current state receded significantly after hitting a new survey high at the beginning of the year. Thirty-two percent of CFOs now say current conditions are good, down from 47 percent, and 23 percent expect better conditions in a year, down from 36 percent. Finally, 37 percent of CFOs say current conditions in China are good, a sharp decline from last quarter's 55 percent, and 27 percent expect better conditions in a year, down from 31 percent.  

As the U.S. rides one of the longest bull markets in its history, CFOs are now more likely to say equity markets are overvalued, at 71 percent, reversing the trend from the last two quarters. Seventy-three percent of CFOs say debt financing is attractive; while that's on par with last quarter, this sentiment is at its lowest level in more than two years. In addition, 56 percent of CFOs say now is a good time to be taking greater risk — down slightly from last quarter's 58 percent and in line with the two-year average.

Prior to 2017, CFOs' top external risks centered heavily on slow economic growth. With global economic performance continuing to improve over the last several quarters, CFOs' worries are now centered on how to deal with geopolitical and socioeconomic events. This quarter, CFOs were overwhelmingly worried about trade policy and tariffs, coupled with uncertainty within the political and regulatory landscape. Regarding internal risks, CFOs are worried about talent, including retaining top talent and acquiring talent with specialized skills. For the first time in 2018, CFOs viewed internal risks (40 percent) more constraining to company performance than external risks (37 percent).

"Last quarter's decline in overall sentiment only continued this quarter, accompanied by a spike in the belief that the equity markets are overvalued," said Sanford Cockrell III, national managing partner of the U.S. CFO Program, Deloitte LLP. "Although overall economic performance is projected to be hovering at the two-year average, it is interesting to see this stark change from the expectations for confidence and growth that hit survey highs earlier this year."

After hitting multiyear highs last quarter, most key growth metrics declined this quarter, but remain strong. Expectations for revenue growth declined from 6.3 percent to 6.1 percent, but remains at one of the highest levels in the last four years. Earnings growth expectations declined from 10.3 percent to 8.1 percent, the lowest level this year. CFOs' expectations for growth in capital investment declined from 10.4 percent to 9.4 percent, the second consecutive decline, but remain above the two-year average. CFOs' growth expectations for domestic personnel fell from 3.2 percent to 2.7 percent, but expectations for dividend growth rose sharply from 4.8 percent to 7.4 percent, the highest level in eight years.

Regarding business focus for the next year, CFOs indicate a bias toward revenue growth over cost reduction (59 percent versus 20 percent). The bias toward investing cash over returning it to shareholders (56 percent versus 19 percent) decreased slightly, but remains near the high levels seen over the past two years. The bias toward current versus new product/service offerings shifted back to current offerings this quarter (43 percent versus 37 percent). The bias toward current geographies over new ones increased somewhat (67 percent versus 16 percent), continuing the trend seen last quarter. Moreover, the recent strong bias toward organic growth over inorganic continued this quarter and reached another survey high (72 percent versus 15 percent).  

With finance talent continuing to be among CFOs' top internal worries, this quarter's survey asked them about the mechanisms they have in place to address the evolving finance workforce and skills. CFOs expect the responsibilities of their finance function to shift beyond accounting, reporting and compliance, to attract and develop finance staff who are more adept with analysis, prediction and decision support. Additionally, 54 percent of CFOs project that their talent roadmap can support a technology-enabled workforce in three years; 45 percent of CFOs believe that most finance work will be conducted via shared service centers.

To address evolving talent requirements, CFOs expect their participation in the gig economy to grow by 88 percent in the next three years, including increased utilization of outsourced, contingent or gig workers, and higher utilization of shared services or offshore personnel. However, the bulk of the workforce will remain nearshore.

CFOs noted that 11.5 percent of their workforce does not have the necessary skills for today's finance function, and that would continue to increase. To gain insight into what skill gaps currently exist in CFOs' finance functions, CFOs were asked where they saw the need for the most development. There was a great variation of responses. However, nearly two-thirds agreed that their finance function requires the most development in analytics, digital technologies and automation; and knowledge of their companies' core business.

"Talent continues to be a top priority for CFOs quarter after quarter. As the finance function evolves, the workforce and workplace need to shift to accommodate the changes in the way work is done and what work drives tangible value," commented Rob Dicks, national industry leader for Deloitte's human capital CFO market offering, and a principal with Deloitte Consulting LLP. "The survey results show that most CFOs are in the very early stages of their talent journeys, but are committed to building a workforce much more focused on analysis, decision support and analytics."