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Beyond The 'fiscal Cliff,' Reasons For Optimism

Here are three things you should watch as you plot an investing strategy for the next four years.

THE BOTTOM LINE

The traditional thinking is that a Democratic president equals higher taxes for businesses. But financial analysts at UBS aren't so sure. In a report before the election, they predicted that the corporate tax rate would drop under Obama or Romney.

And anyway, says Carol Pepper, CEO of the wealth management firm Pepper International in New York, companies aren't going to stop growing just because they're faced with higher taxes.

"That," she says, "is cutting off your nose to spite your face."

Also, for more than three years, companies in the S&P 500 have improved earnings every quarter compared with the year before, according to market research company S&P Capital IQ.

Often, their growth has defied expectations. At the beginning of October, analysts were predicting that third-quarter corporate profits would fall nearly 2 percent compared with a year ago.

With about 90 percent of the companies in the S&P 500 turning in results, they're expected to be up more than 2 percent. And higher earnings generally send a company's stock higher.

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.

Stock quotes in this article: BAC 

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