Playing a Rebound in Corporate Spending

The market yawned through another weak reading on economic sentiment Friday as investors grow increasingly uninterested in Chicken Little stories about the American consumer.

While consumer spending is an important component of gross domestic product, personal consumption has done nothing but rise for the past five years. Retailers from Wal-Mart (WMT Quote) to Saks Fifth Avenue (SKS Quote) have reported strong December results compared with last year's. The market knows consumers are borrowing and spending, regardless of their sentiment.

By far the bigger problem of the last few years was the sharp decline in corporate spending that hit in mid-2001, followed by flat spending almost ever since. Now, perhaps, that is about to change, and investors might be wise to start thinking about where corporate America will start spending its money.

Such logic was behind Credit Suisse's decision to initiate coverage on Alcan Aluminum (AL Quote) with an outperform rating this week. Similarly, with aluminum prices rising, the dollar weak and the economy expanding, Morgan Stanley recommended Alcoa(AA Quote) as a core holding.

Another sector that seems poised for prosperity could be semiconductor equipment. J.P. Morgan analysts not only expect bookings to rise nearly 20% per quarter through the second quarter but for many companies to deliver upside surprises in the coming earnings season. Many of the stocks already sport stratospheric valuations, however, and while many Wall Street firms see more upside, the names are big gambles.

Back in November, the turnaround in semi equipment was confirmed when demand for the goods finally reached parity with supply. This measure, known as the book-to-bill ratio, had been sharply out of balance for more than a year, reflecting massive excess supply.

Morgan believes the uptrend will continue and isn't above recommending its clients take a flier on ASML Holdings (ASML Quote), KLA-Tencor (KLAC Quote), Lam Research (LRCX Quote), Varian (VSEA Quote), Brooks Automation (BRKS Quote) and Cymer (CYMI Quote).