The major stock market rally of 2023 that has defied expectations of a worsening economy is finding new support from what has been a skeptical contingent: chief financial officers at major U.S. corporations. While far from unanimous in their view of the market, more CFOs now see the Dow Jones Industrial Average as being able to continue its rise, even as CFO views on the economy's direction remain negative.
That's according to the results from the latest quarterly survey of the CNBC CFO Council, which shows the view on stocks and the economy from top corporate CFOs shifting in a few notable ways quarter over quarter at a time when the Fed has paused its rate hikes and the stock market has outperformed expectations.
Last quarter, only 13% of CFOs said they could see a new high for the Dow, while more than half (56%) expected a return to the 30,000 level. Now CFOs are split into three roughly equal camps: those who expect a new high, those who still expect a return to 30,000, and those making no bet on the next big move in stocks.
Many investors and economists have come around to the view that the economy will avoid a recession even as the Fed remains committed to bringing inflation down. The latest GDP data reported on Thursday shows a larger than expected boost to economic growth. But CFOs improved market outlook is not in any way tied to belief in the soft landing scenario. Over 80% of CFOs in the second quarter survey say they still expect a recession to occur. The timeline has once again moved out, with only one-third of CFOs expecting a downturn to start in the second half of this year. Last quarter, that was the expectation of more than half of CFOs. Now, just over half expect a recession to hit in 2024 – 36% saying it will begin in the first half of the year.
Much remains unchanged, and negative, in CFO views on the economy. While CFOs say inflation has peaked, they continue to see inflation (32%) as the No. 1 risk to their business. And while U.S. consumer spending and credit has remained relatively strong, CFOs rate consumer demand (18%) as the next biggest risk. Together, the 50% of what CFOs say are the top external risk factors facing their business exactly matches survey results from the first quarter of the year. Over-regulation was also cited by 18% of CFOs as the No. 1 risk, the factor moving up the most in the results, while the risk of Fed policy declined quarter over quarter.
The quarterly CNBC CFO Council Survey was conducted among roughly one-quarter of the 100-plus CFO members from June 16–June 26.
CFO concerns about more Fed rate hikes
In a recent call with CFOs ahead of the June FOMC meeting, multiple members of the council expressed concerns about a deterioration in the consumer outlook that they fear will accelerate. They cited a significant decline in credit scores and delinquencies and supply chain data representing demand. Two CFOs said during the call they had directly reached out to Fed regional presidents to share their view that the Fed should not just pause, but stop interest rate increases due to their fears about what Milton Friedman defined as the "long and variable lags between changes in monetary policy and changes in the economy."
Stocks, most notably tech stocks, have gained as views on the Federal Reserve's aggressive rate hike path changed, and the CFO view of rate hikes has shifted even as they cite inflation as the No. 1 risk. CFOs are now less in line than the market with what Federal Reserve Chair Jerome Powell has coming next for interest rates. Half of CFOs say they expect the Fed to hold off on another rate increase in July, with just over one-third (36%) expecting a hike, while traders overwhelmingly expect a rate hike and Powell said in a speech this week that multiple consecutive rate hikes could be coming.
This slightly more dovish view detailed in the quarterly CFO survey has lowered the end-of-year outlook for the yield on the 10-year treasury. While the majority still expect the 10-year yield to be at least equal to or higher than its current range between 3.5-3.99%, almost a quarter of CFOs (23%) now think the yield may drop below that level. The largest subgroup of CFO (41%) expect the 10-year to end 2023 in a range of 3.5-3.99%. Thirty-seven percent of CFOs expect the 10-year yield to be 4% or higher.
'Inflation isn't whipped yet'
Whether the CFO view of rates is wishful thinking on the part of some companies in sectors feeling the biggest impacts from higher rates, or bound to become more widespread central banking policy belief, remains unclear. At a recent council private event with CFOs in New York City, many members seemed resigned to a Fed that won't change its rate path even if they believe it should. One CFO who was granted anonymity to speak freely at the event was adamantly in favor of more hikes, saying, "We need more hikes because inflation isn't whipped yet." The CFO added that based on the relative strength of U.S. consumers, they have the ability to accept additional price increases and higher interest rates, even if they don't like them.
Inflation will remain a huge problem for the economy even if CFOs continue to express a positive view of the job the Fed is doing fighting inflation. Now, over 90% describe the Fed's actions as fair (55%) or good (36%). That's up slightly from last quarter. But CFOs do not think the Fed will be successful in bringing inflation back down to its target rate of 2% any time soon. Most (59%) think it will be 2025 or later before that occurs.
One problem gaining more attention from CFOs is the inability of the Fed to fight inflation with major government spending programs supporting the economy. Former Dallas Fed President Robert Steven Kaplan told CFOs at the recent private event in New York that while the Fed has raised rates 10 times over the past year, fiscal spending continues at very high levels. The remnants of the 2021 American Rescue Plan Act (ARPA) are still sitting in the bank accounts of state and local governments. This money must be "obligated" by the end of 2024 and spent by the end of 2025. In addition, the Inflation Reduction Act (IRA) and spending from the infrastructure bill are fueling new projects around the U.S. These programs increase the demand for goods, services and labor at a time when the Fed is attempting to cool demand for goods, services and labor.
"These programs are of the type you might historically see after, not before, a recession … except we are doing them now," Kaplan said. He said in follow-up comments to CNBC, "Let's have a war on inflation that's more than just the Fed raising rates."
That would involve potentially extending the time frame for spending remaining ARPA money and prioritizing and spacing out IRA and Infrastructure Act spending. He emphasized that a number of the projects enabled by these programs are critical to the future of the U.S., projects helping to increase semiconductor capability, support a sustainable energy transition, fight climate change, and build electric car infrastructure. "But the magnitude of the spending must be balanced with the need to fight inflation," Kaplan said. He cautioned, "when this much money is being spent in a short period of time with hard deadlines for spending it, some number of the resulting projects might be of 'marginal' efficacy."
This view of a unique economic setting that supports both resilience in economic growth and higher inflation has been cited by other top C-suite officers. "We are all seeing it," Tamara Lundgren, CEO of Schnitzer Steel, said at the recent CNBC CEO Council Summit. "Infrastructure funds coming through the system ... electric vehicles and battery and solar and wind, long-term structural drivers of demand," she said. There is a good possibility of recession, but she added, "Whatever this recession is, we may need a new name for it. I'm not sure history has ever seen this before."
Fed watchers and top executives remain concerned. "I am worried. There's no question ... when you look at all of these impacts, the rate increases and the continued inflation we see, there is only so much consumers can take," said Wells Fargo CEO Charlie Scharf in an interview with CNBC's Andrew Ross Sorkin at this week's Aspen Ideas Festival. He said credit metrics the bank reviews that remain "extraordinarily strong," but he added "they are deteriorating slowly, week after week, month after month."
"As long as that's orderly, that's not the worst thing in the world because people have to adjust to a more normalized environment, but that's a very, very hard thing to do," Scharf said.
"Too much money was pumped into the economy" by both parties, he said. "Now the question is, are we all aligned on fiscal and monetary policy to deal with the issue we need to deal with," Scharf said. "We talk about inflation as theoretical. Inflation isn't theoretical. It impacts people in a very real way. And its negative effect just grows, potentially exponentially, especially for those with less money."
Former Fed Vice Chair Roger Ferguson, who was interviewed alongside Scharf at Aspen, said everyone has been surprised by the economic resilience, but he continues to believe there will be a "short and shallow recession." He has been consistent in his expectation for multiple rate hikes from the Fed in the foreseeable future and belief that the economy will enter a recession. His reasoning: in the past dozen or so instances when the Fed has attempted to engineer a soft landing, they generally have not succeeded. "You don't know the tipping point," Ferguson said.
NBCUniversal News Group, of which CNBC is a part, is the media partner of the Aspen Ideas Festival.
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