Salient to Investors:

The average analyst expects capital spending by S&P 500 companies to drop 1.3 percent in 2013 after 3 years of growth. Bears say the last decline was at the end of 2008, just before stocks slumped to a 12-year low, and expect CEO pessimism to sap the rally. Bulls say any decline will be limited and believe the improving U.S. economy will lift equity valuations that are 12 percent below the 58-year average.

Abi Oladimeji at Thomas Miller Investment said the danger of policy errors could undermine equity markets and the broader economy.

Joseph Tanious at JPMorgan Funds sees a compromise over the fiscal cliff, thus diminishing the impact of any corporate spending reductions – close to the high reached in 2012. Tanious expects multiple expansion more than earnings growth.

The S&P 500 trades at 14.4 times trailing earnings, 12 percent below the 6-decade average, while S&P 500 options prices are the most bullish in the last two years. The bull market reaches the average length since World War II in April 2013. U.S. stocks had the worst performance among 24 developed equity markets in Q4.

Analysts expect S&P 500 capital spending to decline 1.1 percent from a year ago in Q2 2013, decline 0.6 percent in Q3 2013, and decline 7.4 percent in Q4 2013. The measure accurately forecasts changes in corporate earnings and stock market prices.

The Institute for Supply Management expects manufacturing spending to grow 7.6 percent in 2013, the largest for any December survey in at least seven years. 23 percent of the Business Roundtable expects company spending to fall in the next 6 months versus 19 percent in Q3. Doug Freedman at RBC Capital Markets said semiconductors are seeing a lower-than-normal seasonal Q4 because of the fiscal cliff.

Over 140 companies in the Russell 3000 Index have declared $18.7 billion worth of special dividends since Sept. 1, more than 3 times the average market value of companies in the gauge. Malcolm Polley at Stewart Capital Advisors said distributions show businesses are confident to pay out cash but not enough to invest in larger projects.

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