Beyond the 'fiscal cliff,' reasons for optimism

Associated Press Modified: November 11, 2012 at 1:15 pm •  Published: November 11, 2012
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That's no guarantee, of course. Revenue for the third quarter so far is up only about 0.6 percent, which means that companies' profit growth is driven not by selling more goods and services but by cutting costs, which can mean laying off workers or trimming salaries.

And compared with a year ago, the earnings and revenue growth is downright anemic. In the third quarter of 2011, earnings grew more than 17 percent over the previous year, according to S&P Capital IQ. Revenue was up more than 11 percent.

Still, if companies managed to grow profits during a slow economic recovery, they should have no trouble doing it if the economy really picks up.

THE CHINA MACHINE

You can't consider the future of the world economy, and therefore the future of the U.S. stock market, without considering China, the world's second-largest economy behind the United States.

You've probably heard that economic growth in China has slowed. But China's economy is still growing at an annual rate of 7.4 percent, more than triple the U.S. rate, and far better than the contraction in most of Europe.

China's middle class is huge and expanding. That makes it more expensive for U.S. companies to produce goods there because of higher living standards, but it also means more customers for American companies to sell things to.

Adrian Day, president of Adrian Day Asset Management in Annapolis, Md., says he's optimistic on China, though it's not without risks. Young people moving en masse from the country to the city can fuel social tensions, and the country's rules still prove baffling or impenetrable for many foreign investors.

"However pessimistic people are about China," Day says, "China's economy is still growing."

DRY POWDER

One popular theory for why the economy is set to improve: Companies hoarded money during the financial crisis and now sit on record piles of cash. The Fed says nonfinancial companies hold about $1.7 trillion in cash and other liquid assets.

Companies have cut back spending on machinery, tools, software and other so-called capital goods, resulting in the slowest growth in "capital stock" in nearly 50 years, notes Michelle Meyer, the U.S. economist at Bank of America Merrill Lynch.

"The positive story is that once the fiscal cliff is resolved, even if it's a messy process, some of the uncertainty hanging over businesses will be removed," she says.

Pent-up demand from corporations could turn into spending in the spring and pick up through next year.

Jeremy Zirin, chief equity strategist at UBS Wealth Management, says the cash heap is the "dry powder" that will fuel growth.

A major caveat: Market watchers have been talking about companies sitting on cash for a long time. The amount has been roughly the same nearly three years, and nothing so far has convinced companies to spend it liberally.