The Chinese lunar calendar designates 2024 as the Year of the Dragon, a mythical creature seen as riding clouds and mist, embodying both power and benevolence. However, for Chief Financial Officers (CFOs), the trends influencing corporate fortunes in the new year are not mythical, nor are they guaranteed tailwinds.

Financial executives who familiarize themselves with the following five trends will be better equipped to seize opportunities and navigate challenges.

1. Cooling Inflation: Soft Landing Expectations Strengthen

As CFOs enter 2024, inflation—the factor that has posed the greatest threat to their planning and performance in recent years—is showing signs of receding. The Federal Reserve's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, which excludes volatile food and energy prices, has slowed to a 3.2% annual rate in November from 4.2% in July.

Economists at Moody's Analytics and Goldman Sachs expect that Federal Reserve policymakers are on track to win their most intense battle against price pressures in four decades in the fourth quarter, bringing inflation back to the 2% target level. Slowing inflation is just one signal that the Fed may achieve a 'soft landing,' meaning curbing inflation by pushing its key interest rate to a 22-year high while avoiding a recession or widespread job losses.

On the economic front, the widely predicted recession in 2023 did not materialize. Moody's expects U.S. economic growth to slow from an annualized 4.9% in the third quarter to a range of 1.5% to 1.7% in 2024, which would still be healthy. Consumer spending has also exceeded expectations, and the labor market remains healthy and is cooling as the Fed anticipates. Employers added 2.7 million jobs last year, lower than in 2022 but above pre-pandemic levels. The unemployment rate held steady at 3.7% in December, up from 3.4% earlier last year; Moody's expects it could rise to a range of 4.1% to 4.2% by the end of 2024.

While assessing the optimistic data, analysts are also focusing on risks that could cloud the economic outlook. 'Inflation and Federal Reserve interest rate policy remain the top risks,' Moody's Deputy Chief Economist Cristian deRitis said in an interview. Policymakers could keep borrowing costs too high for too long, triggering an economic downturn; or they could cut rates too early, causing price pressures to resurface.

deRitis also pointed to other risks: commercial real estate owners need to refinance debt at the highest interest rates in decades while facing high vacancy rates, and bankruptcies or asset impairments could weigh on bank balance sheets; financial markets need to contend with rising and unsustainable federal debt levels; rising unemployment could dampen consumer spending, which supports nearly 70% of economic growth. Additionally, the Israel-Hamas war could expand, exacerbating already tense global situations stemming from Russia's invasion of Ukraine and cross-strait tensions, and an escalation of conflict would increase the risk of cyberattacks on critical targets such as U.S. financial institutions and infrastructure.

'There are indeed geopolitical threats,' deRitis said. 'These factors could derail the economy, and vigilance is needed.'

2. A Rebound in M&A?

The prospects of falling price pressures, lower borrowing costs, and steady economic growth could drive a recovery in merger and acquisition (M&A) activity in 2024. This follows a year that, by some measures, saw the biggest drop in M&A deal volume in a decade. According to M&A experts, total U.S. M&A activity in the first nine months of 2023 fell 24% year-over-year, with the number of deals down 4%, based on data from sources like Refinitiv, as released by the law firm Skadden, Arps, Slate, Meagher & Flom last month.

David Dean, Managing Director of M&A Advisory at WTW, said in an interview that M&A value and deal volume likely bottomed out in the second quarter of 2023. In recent months, dealmakers have particularly focused on relatively smaller transactions that can strengthen a company's growth strategy. 'These are green shoots compared to a year ago,' Dean said. 'People are really trying to achieve what I call the 'Goldilocks' sweet spot when determining deal valuations.'

Beyond economic tailwinds, 'pent-up interest' among the C-suite in growing through acquisitions or joint ventures without increasing their risk profile could also drive M&A. Dean noted that many companies need to refinance debt at higher interest rates this year, which could prompt some to seek mergers; companies with weak balance sheets could become acquisition targets. The unexpected 24% rise in the S&P 500 in 2023 could also stimulate deals. 'A strong stock market benefits both acquirers and sellers,' Dean said. 'If both sides feel they have strong portfolios, mergers become easier.'

3. AI's Reckoning Year

The S&P 500's surprising surge last year was partly fueled by enthusiasm over the productivity and innovation potential of generative AI. Large companies like Microsoft, Nvidia, and Google led the rally on prospects of massive AI profits. However, AI experts and executives expect skepticism to sweep away some of the hype in the new year.

'This year, people are starting to say, 'Show me the money,'' Arijit Sengupta, CEO of Aible, said in an interview. 'If you hear someone say AI is magic, cut their budget,' he said. 'New vendors and internal stakeholders—if they treat it as magic, they'll mess up and ultimately hurt your company.'

The technology is already ubiquitous. A PricewaterhouseCoopers survey of 1,026 U.S. executives at companies with at least $500 million in revenue last year found that nearly three-quarters (73%) of U.S. companies have adopted AI, with 54% of them 'leading with generative AI.' Bloomberg Intelligence forecasts the generative AI market will explode from about $137 billion this year to $1.3 trillion by 2032.

Source: Bloomberg Intelligence

Sengupta advises that CFOs in 2024 should integrate generative AI deeply and broadly into their companies, fully leveraging its 'democratizing' power. 'Get as many people as possible up to speed on this technology as quickly as possible,' he said. He mentioned that most Aible clients have already accelerated from launching one to three generative AI projects per month to 100 projects. CFOs should use generative AI to transform processes like order-to-cash systems and break down silos across functions such as marketing, sales, and finance to gain new insights. Aible provides cloud-based AI software. Given the accelerating pace of AI advancement, CFOs cannot afford to delay; 'speed is key.'

4. Tighter Cybersecurity Regulation

For years, CFOs have had to budget for defending against ransomware and other cyberattacks, often at high cost and reactively. In 2024, facing new rules from the U.S. Securities and Exchange Commission (SEC), many CFOs will also need to urgently fund cybersecurity compliance.

Since December, the SEC has required companies to disclose in their annual 10-K filings how they manage cyber risks, including defensive measures, board oversight of cybersecurity, and assessments of potential and actual attacks. Companies must also disclose in detail within four days of discovering a cyberattack that could result in material losses. Scott Lesmes of the law firm Morrison Foerster said CFOs should expect the SEC to be particularly vigilant in the coming months. 'Enforcement in this area is becoming more frequent,' he said, advising CFOs to consider how to maintain compliance.

In an interview, Lesmes emphasized: 'First and foremost, controls, controls, and more controls.' CFOs should establish detailed processes: identify cyberattacks early; focus on high-risk events; convene internal counsel; and report the most threatening attacks to the CEO and board. After an attack occurs, CFOs should describe it as an actual event rather than a hypothetical scenario. 'It seems like a small thing, but the SEC pays close attention.'

5. Climate Risk Disclosure Rules Are Coming

According to lawyers specializing in securities regulation and ESG compliance, the SEC may issue the final version of its climate risk rules this quarter. Since the proposed rules were released in March 2022, the SEC has reviewed a record 14,000 public comment letters while revising requirements for listed companies to disclose carbon emissions data, climate change risks, and response strategies.

The most controversial aspect is the requirement for companies to detail so-called 'Scope 3' greenhouse gas emissions in their supply chains, from upstream suppliers to downstream customers. 'That requirement may be adjusted, which would be beneficial for the SEC given the long time since the proposed rules were issued and the numerous comments,' Dave Brown of the law firm Alston & Bird said in an interview. The rules will almost certainly trigger litigation, focusing on their high costs and claims that the SEC has exceeded its congressional mandate.

Critics such as the U.S. Chamber of Commerce argue that the SEC has underestimated compliance costs. For example, the SEC estimates an average hourly rate of $600 for compliance consulting, while a more realistic figure might be $800, Brown said. After the final rules are issued, compliance costs could soar due to surging demand for climate risk expertise. 'CFOs have been monitoring and starting to act, but they don't know the outcome,' Brown noted, with recession forecasts prompting budget tightening. But once the rules are issued, 'you'll see a hockey-stick surge in climate risk disclosure spending.'

Brown believes the SEC may want to issue the final rules and resolve litigation as soon as possible to prevent critics from gaining more leverage in the November elections. 'The SEC has an incentive to issue the final rules and start the clock' to address any opposition. He advises CFOs to steadily build their companies' climate risk compliance programs, including risk measurement and overall controls. 'Unless you're fighting for a budget increase, there's no need to panic.' Ensuring the accuracy of data such as carbon emissions is also crucial because, under SEC rules, this data will be subject to audit. Furthermore, 'make sure you don't do this in isolation; understand how it affects the overall strategy, the overall business, and can be linked to profitability,' Brown said. 'That's what investors are really focused on.'