For immediate release
October 22, 1997
Financial Executives Institute
The Fuqua School of Business
CFOs OVERWHELMINGLY EXPECT HIGHER CORPORATE EARNINGS
DURHAM, N.C. -- Top financial executives cast a vote of confidence for strong growth in
corporate profits over the next four quarters, according to the most recent Financial Executives
Institute / Duke-Fuqua School of Business Corporate Outlook Survey. The survey indicates that
CFOs also see no let-up in the continuing overall growth in the national economy.
Eighty-eight percent of the 486 executives polled expect corporate earnings to be higher over the
next four quarters than they were over the previous four quarters. In fact, the survey's earnings
index for the next four quarters stands at an historical high of 79, up from last quarter's 78 and up
sharply from last spring's level of 69. (An index value of 100 means that 100 percent of the
executives polled believe that earnings will increase. An index value of -100 means that 100
percent of the executives believe that earnings will decrease.)
The latest survey results mirror the optimism expressed over corporate earnings in the July
survey. "At that time, many were anticipating a dip in corporate earnings, but our findings told a
different story," notes Professor John Graham, director of the FEI-Fuqua Survey. "Recent
earnings reports confirm that the sky isn't falling after all."
With price/earnings ratios in the stock market at or near all-time highs, many financial
economists feel they are not sustainable and fear that stock prices will fall. The newest
FEI-Fuqua survey paints a different picture, however. "The vast majority of CFOs surveyed
believe that profits will increase enough in the near term to bring price/earnings ratios back in
line with historical averages," according to Graham.
Outlook differs by industry, region
While growth is anticipated to be strong for most industries, CFOs in banking and finance are the
most optimistic, while those in retail and wholesale have the least favorable outlook. "The latter
could be related to the difficulty retail and wholesale firms have encountered in their recent
attempts to increase prices," Graham explains. He also notes that CFOs of medium-to-large firms
(2,500 - 9,999 employees) are currently the most optimistic and that anticipated earnings growth
is strongest in the Southeast.
Expectation of recession drops
Consistent with these expectations of higher earnings, the consensus forecast of the probability of
a recession over the next four quarters has fallen to less than 20 percent, whereas last spring the
CFOs put the probability at more than 25 percent. Their assessment of the probability of an
increase in interest rates has fallen as well. Last spring, CFOs surveyed felt that there was a 75
percent chance that interest rates would increase over the next four quarters. In the most recent
survey, the consensus is that there is approximately a 50 percent chance that interest rates will
climb during the period. "CFOs may be more optimistic now because they expect productivity
improvements to continue and they recognize that inflation remains under control," adds William
U. Parfet, FEI chairman and co-chairman of MPI Research of Mattawan, Michigan.
Business Strength Index rises
"Our Business Strength Index, which combines earnings, capital investment, research and
development, merger and acquisition activity and employment plans, has risen to a record level
of 48, up from 43 in the previous quarter," says Graham. "For example, a record two-thirds of
CFOs think their firms will increase employment over the next year, while only 10 percent
expect a decrease. This will put more pressure on an already tight labor market."
M&A activity remains high
The survey results indicate that merger and acquisition (M&A) activity, which is already at an
all-time high, will increase even more over the next year. The M&A index rose to 38 this quarter,
up from 35 last quarter and 27 last spring. "There is no indication that M&A activity is waning,
which is somewhat surprising given the record level of the stock market," according to Graham.
"However," he adds, "this is consistent with CFOs' belief that earnings will continue to grow,
rather than that the market is overvalued."
The survey conducted by FEI and Fuqua polled a broad cross-section of financial executives
from 2,500 U.S. companies during the week of October 1-7. Four hundred eighty-six of the
executives completed the survey, for a response rate of 19 percent. Complete survey results are
available on the Internet at:
About FEI and Fuqua
Financial Executives Institute is the leading advocate for the views of corporate financial
management. Its 14,000 members hold policy-making positions as chief financial officers,
treasurers and controllers at 8,000 companies throughout the United States and Canada.
The Fuqua School of Business at Duke University was founded in 1970. Fuqua's mission is to
provide the highest quality education for business and academic leaders and to promote the
advancement of the understanding and practice of management through research.