➤ Interest rates are expected to decline from early to mid-2024, but the higher-for-longer environment will keep pressure on dealmaking.

➤ Positive consumer price index data "changes everything" and could see rates fall sooner than expected.

➤ Executive confidence is also a key factor in dealmaking recovery.

Financial sector dealmaking will get a welcome boost if the interest rate hike cycle ends in 2024, analysts said during an S&P Global Market Intelligence webinar on Nov. 15.

Chiefly driven by higher interest rates, there has been a downturn across all segments of dealmaking from 2022 and into 2023, Market Intelligence's US financial institutions news desk manager, Joe Mantone, said during the "The Big Picture: Outlook for 2024" webinar.

"In a higher rate environment, debt issuance becomes more expensive and companies more reluctant to pay for that pricier paper," Mantone said. "A higher rate environment tends to drive down equity prices, making equity issuance less appealing ... higher financing costs and more dilutive equity raises change the math around deals."

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The end of the hiking cycle would serve as a catalyst for dealmaking, even if rates stayed steady, as it would provide greater clarity regarding the cost of issuances and potential acquisitions.

"We do expect to see a pickup [in M&A] in 2024 with the more steady rate environment, absent any macroeconomic financial shocks," Mantone said.

Debt issuance would likely be the first to show signs of recovery, followed by equities and then M&A.

As for when that might be, Nathan Stovall, Market Intelligence's director of financial institutions research, said recent consumer price index data from the US — which showed that inflation was flat month over month and up only 3.2% year over year in October — has brought some expectations forward.

The core consumer price index, which strips out volatile food and energy prices, increased 4% from October 2022 to October 2023, the smallest yearly increase since September 2021, the US Bureau of Labor Statistics reported Nov. 14.

There is some expectation, Stovall said, that the Fed could begin lowering rates as early as March 2024, although May is more likely. A total reduction in interest rates of 125 basis points by the year-end is possible. This is against earlier predictions, made before the consumer price index data was released, of the Fed holding rates steady through the first half of 2024 and then lowering rates incrementally to a total 100-basis-point deduction by the first quarter of 2025.

"The [consumer price index data] really changed everything," Stovall said.

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Executive confidence will also be an important factor, Mantone said. Economic forecasts are key in determining confidence among executives, which is crucial in dealmaking, especially M&A.

"When forecasts are weaker, there's more uncertainty in the outlook, and executives have less confidence to pursue acquisitions," Mantone said.

Although expectations of a recession have recently quieted, various polls show executives are still cautious.

"Going into next year, I'll certainly be watching to see if we get an improvement on that front. The end of the rate hike cycle would certainly be a driver to boost executive confidence," Mantone said.