By Kate Gibson

With businesses and consumers paying less for goods than a year ago, Corporate America is getting a bigger break than the average shopper, a disparity that historically represents a good omen for U.S. stocks' performance in the third quarter.

In theory, the margin between prices paid at the producer and consumer levels offers insight into a company's ability to pass on, or benefit from, price adjustments to the consumer, said Dan Greenhaus, an analyst at Miller Tabak & Co.

"When PPI comes down and CPI outperforms it, that's a favorable environment for retail, since in theory, costs are going down and prices are holding firm. So I would say that's true especially for firms that sell real basic goods to consumers, like a Home Depot (HD), that sell lumber, fertilizer and all that stuff," said Jack Ablin, chief investment officer, Harris Private Bank.

There tends to be a lag between price declines in producer products and those purchased by consumers, given corporations tend to sign long-term contracts and hedge their purchases of oil and other commodities on the spot market, said Owen Fitzpatrick, head of U.S. equity group at Deutsche Bank.

"It's rare for Procter & Gamble (PG) to say, 'we're going to buy resin on the spot market,' when maybe they bought 50% of it when prices were higher," said Fitzpatrick.

Oil companies, like XTO Energy Inc., (XTO) have hedged out a lot of their contracts, unlike the average consumer, who isn't going 'go ask the A&P to give me a forward contract on their basket of goods,'" adds Fitzpatrick.

On Monday, the financial and energy sectors fronted the gains as stocks extended their longest winning streak of the year. The Dow Jones Industrial Average (DJI) added 104.21 points, or 1.2%, to 8,848.15. The S&P 500 Index (SPX) rose 10.75 points, or 1.1%, to 951.13, while the Nasdaq Composite (RIXF) climbed 22.68 points, or 1.2%, to 1,909.29, with the technology-laden index tallying gains for a ninth consecutive session.

In the latest government readings, producer prices were down 4.6%, year-over-year, while consumer prices were down just 1.4%, "suggesting that while businesses are paying 4.6% less for goods than one year ago, consumers are paying only 1.4%," said Greenhaus.

Going back to 1950, the S&P 500 has increased 1.39% in the three months following quarters in which the PPI has increased at a greater year-over-year rate than the CPI, the analyst said. "For instance, the CPI increased 4.9% at the end of the Q3 2008 while the PPI increased 8.8%," said Greenhaus.

However, following times in which consumer prices increased at a greater year-over-year rate than producer prices, the S&P has increased 2.32% over the following three months. "For instance, the CPI increased 1.5% in the third quarter of 1998 while the PPI fell 0.9%. The S&P rose 21% in the fourth quarter of that year," he said.

And, while declines in year-over-year CPI figures are few and far between, if history is any guide, "a widening spread between the prices paid by businesses and the price paid by consumers could bode well for equity performance in the third quarter," said Greenhaus.

The equities market enjoyed strong earnings growth coming out of the 2003 recession, and investors could well see a replay in 2010, said Fitzpatrick.

"The real story from earnings has more to do with leverage. It's not going to take a lot of revenue growth, based on cost structure coming down. With unemployment close to 10%, companies have done quite a bit of cutting, and the business models are very leverage-able," said Fitzpatrick.