What If the U.S. Economy Surprises Us—To the Upside?

Ramping up cyclical sectors and stocks may make sense.

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XLY has almost 74 percent of its assets invested in companies with economic moats, a designation assigned by Morningstar's equity analysts to firms that possess significant and durable competitive advantages. In addition, eight of the fund's top 10 holdings sport economic moats.

[See Should You Have ETFs in Your Portfolio?]

Investors can also consider Vanguard Consumer Discretionary ETF (VCR). It holds a vast 369 companies, making it a diversified play. Otheroptions include First Trust Consumer Discretionary AlphaDEX (FXD) or the more thinly traded PowerShares Dynamic Consumer Discretionary (PEZ) and Guggenheim S&P Equal Weight Consumer Discretionary (RCD).

The rub? There are factors that could potentially sully the optimists' view, including increased volatility leading up to the presidential election; long-term debt burdens for Europe and the United States; higher oil and gasoline prices, which could eat away at other consumer spending; and a stronger-than-expected pickup in inflation.

Europe's developments continue to be closely monitored (the collapse of the Dutch government over failure to pass an austerity package and a forced French presidential run-off are only the latest wrinkles), but the U.S. economy and the markets are showing some independence from the continent.

"Chances are that a mild, brief recession in Europe won't have a huge impact. Many of the structural factors that are hurting Europe aren't present in the U.S. at the moment," writes Morningstar's markets editor Jeremy Glaser. "No one is worried that the dollar is going to collapse and that each state is about to issue its own currency. U.S. firms and banks have been girding for a European crisis and generally have diversified enough revenue streams to handle a mild downturn in demand."

"If the recession turns out to be much deeper than it is right now, and particularly if Germany gets hit hard, the impact on the U.S. is going to be larger. Investors would be well-served keeping an eye on Europe and making sure a slowdown there isn't throwing off the United States' burgeoning recovery," wrote Glaser.

According to economists at the Royal Bank of Scotland, brighter economic data are masking the bigger picture for now. The greatest threat to the medium-term outlook for U.S. growth remains the changes in fiscal policy slated to take effect in January 2013, they said in a research note. The Bush-era tax cuts are set to expire, along with the payroll tax holiday and extended unemployment benefits. In addition, the first tranche of the $1.2 trillion in automatic spending cuts (evenly distributed over nine years) mandated by the Budget Control Act of 2011 are to be instituted.

Another risk to the bullish scenario: What if China slows more than expected? Big-machinery makers such as Caterpillar (CAT) make a chunk of their profits in China and other developing nations.

As always, diversification is important. "We would not pare back allocations to dividend-paying stocks too much—the dividends may yet prove to be welcome if volatility raises to levels anything like last year's," Cetera's Gendreau added.