A letter to CEOs, chief strategy officers and directors

Dear CEOs, chief strategy officers and directors:

This month marks the start of my third year as Vice Chair of 安永 Strategy and Transactions in the Americas. To say the least, I assumed this role at a challenging time: a pandemic still raging, markets volatile, historically high US inflation and geopolitical turmoil. Even as we still navigate these headwinds, I have reason to expect a more favorable climate for enterprise leaders and dealmakers in the months to come.

As shown by our first-ever EY Deal Barometer —which uses historical economic and financial market indicators to predict future trends in corporate mergers and acquisitions (M&A) and private equity deals—we enter 2024 poised for inflection. The US Federal Reserve is signaling the end of its historic tightening cycle, and economists say the potential for a “soft landing” is stronger than ever. As a result, corporate leaders like yourselves, who finally have a line of sight toward a lower cost of capital, are unlocking new growth opportunities.

To be sure, the aftereffects of pandemic shocks that have reshaped the economy, markets, and the workforce are still with us. Moreover, significant risks loom in the coming year. Our permacrisis of geopolitical volatility, slower consumer spending and the impact of disinflation could all pull the punchbowl from the party—to say nothing of what promises to be a fiercely contested US election, as well as other pitched political battles in major global markets.

Nonetheless, now that we are returning to pre-pandemic levels of M&A, we expect stable growth throughout 2024 and gradual growth beyond. Increasingly, clients are engaging our EY teams for help boosting free cash flow, reimagining their portfolios and exploring deals that can transform their business.

What this means for you is that now is the time to review capital allocation plans and company portfolios closely. Your stakeholders continue to expect returns regardless of economic conditions.

Lessons learned in 2023, expectations for 2024 and beyond

With 2023 in the rearview, the trajectory of the inflection is becoming clearer. Last year saw the US Fed funds rate reach a two-decade high and a bottoming-out in the deal markets. As the cost of capital rapidly surged, slower global economic activity, increased macroeconomic uncertainty and heightened geopolitical tensions led to a severe pullback in dealmaking activity, while a resilient consumer sustained economic growth.

Enterprise leaders continued to make transformative deals, especially in sectors where deal multiples came down, such as life sciences, technology and energy. The tech sector in particular was buoyed by the late-2022 emergence of generative artificial intelligence (GenAI), which spurred strategic leaders in 2023 to shift from an experimental phase to begin creating enterprise value. However, many CEOs are finding that buying AI technologies and expertise creates competitive advantage more quickly than trying to build that capability from the ground up.

At the very end of the year, the US Federal Trade Commission and the Department of Justice issued their final?guidelines for mergers and acquisitions. These FTC–DOJ guidelines signal greater scrutiny of deals, but we are advising clients not to lose sleep, or to lose focus on their portfolio goals. Corporate leaders do need to prepare for greater information flow and build in longer deal timelines, of up to two or three additional months—especially when the Hart-Scott-Rodino (HSR) filing requirements are updated around midyear 2024.

Even with these impediments, we expect the number of deals to gradually pick up. For corporate M&A, our baseline expectation is 12% average growth in 2024, and we anticipate a return to pre-pandemic deal volume, with the number of deals in 2024 only about 2% below the average number in 2017–19.

On the whole, you and your counterparts are entering 2024 with a positive outlook and new tailwinds. The US economy is expected to outperform global markets. Accordingly, as we chronicled in the October 2023 edition of our CEO Outlook, US CEOs are more optimistic than their global counterparts. Even before the Fed’s repositioning on interest rates, a majority of CEOs in the US (93%) were planning transactions in the coming year, and fully 100% are planning significant investments in GenAI.

As you adjust to this turning point and what it means for reinventing your company for a better future, we will be by your side, advising you on how to foster innovation and long-term value creation.

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The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.