According to a new Grant Thornton survey of merger and acquisition professionals, 72% of respondents expect deal volume to increase over the next six months despite rising interest rates threatening access to capital and uncertainty about a potential increase in capital gains taxes.

Almost two-thirds (63%) of the more than 150 respondents said pending tax legislation could have a positive impact on their deal plans. Some believe volume could increase through the end of the current year if a rise in capital gains tax is implemented for 2023.

“The Biden administration has proposed taxing capital gains of some taxpayers at the ordinary income tax rate, a rate that it also proposes to increase,” Candice Turner, national managing principal of M&A tax services for Grant Thornton, said. “The difference is significant enough that taxpayers would still be better off to accelerate the tax into 2022. Just the threat of change is likely to propel M&A activity through the end of the year.”

The anticipated rise in deal volume follows a cooling-off period over the summer after a remarkable surge at the end of 2021.

“Deal activity was unprecedented last year,” Elliot Findlay, Grant Thornton’s national managing principal of M&A, said. “This summer, volume plateaued from previous levels as never-before-seen volume in 2021 began to slow.”

The survey also found that more than two-thirds (69%) of those surveyed have a remarkably positive outlook for the U.S. economy despite high inflation and rising interest rates. This outlook stands in stark contrast to the pessimism reflected in Grant Thornton’s Q2/22 CFO survey, when just 39% of respondents said they had a positive outlook for the U.S. economy over the next six months.

While CFOs are fretting over inflation, more than half (55%) of M&A professionals said inflation has a positive impact on deal activity. Eric Burgess, a partner in Grant Thornton’s M&A practice, said companies that can pass on inflationary effects to consumers are maintaining their margin percentages and, in effect, boosting deal activity. In other words, inflation is having vastly different effects on companies depending on whether customers deem their services essential or not.

The industries that reported the most positive effects of inflation for M&A were transportation, warehousing and logistics (80% positive), healthcare and life sciences (72%) and banking (67%). More negative effects of inflation on M&A were reported in hospitality and restaurants (73% negative), services (67%) and insurance (62%).

Optimism over the valuation of deals remains strong but has faded just a bit from previous surveys. Even in an environment in which inflation could be expected to give at least a modest boost to valuations, just under half (49%) of respondents expect deal valuations to increase, down slightly from 57% in April and 53% last fall.

The slightly softening valuation trend is in line with Burgess’ comments in Grant Thornton’s 2021 M&A survey conducted last October, when he said valuations were at unprecedented levels and he did not expect continued significant increases to purchase prices. Burgess added that some deals are being put on hold in the retail and consumer goods sector as companies struggle to move their inventory.

Dealmakers are also watching for the SEC’s climate change disclosure rules to be issued later this year. Enthusiasm for due diligence on environmental, social and governance (ESG) issues seems to be growing after a brief fade. Last October, 97% of respondents said a target’s ESG program and reporting capabilities mattered when considering a deal. That number dropped to 77% in the spring, but it rebounded to 86% in the new survey.

“Dealmakers are cautiously optimistic about the rest of the year and are trying to be nimble in preparation for any changes that could skew the outlook for 2023,” Findlay said.