The stock market's summer gyrations may not inspire much confidence, but a more subtle indicator might.

The latest crop of earnings reports, which has surprised most analysts, shows corporate cash balances are unusually high. That means a wave of merger activity could be in the offing, adding vigor and earnings growth to companies emerging from a brutal recession.

Deals have been on the rise lately. The number of mergers worth $1 billion or less rose 47% in June over the year-ago period, according to a recent report from the investment bank Robert W. Baird & Co. The total value of those deals, which represents 95% of the U.S. M&A market, rose 92% from a year ago, to $71.4 billion.

For the year to date, the total number of deals has risen 52% to 5,833, and the total value has climbed 16% to $448 billion.

Stephen Roge, a portfolio manager at R.W. Roge & Co., a Bohemia, N.Y. investment firm, says the pickup in merger activity bodes well for investors.

"It means CEOs have some confidence," he says. "I doubt they'd be shelling out $1 billion for another acquisition if they thought the economy was heading for a double dip."

There's certainly enough cash in the corporate coffers to make plenty of mergers happen.

The Federal Reserve reported that nonfinancial companies at the end of March were sitting on $1.8 trillion in cash and other liquid assets, a 26% jump from the same time a year ago and a record amount.

With interest rates at record lows, it's nearly impossible for cash on the sidelines to add meaningfully to the bottom line on its own, says Hiter Harris, co-founder of Harris Williams, a mergers and acquisitions advisory firm that's a subsidiary of the PNC Financial Services Group.

"When you have cash that's earning no interest, you really have no choice but to find acquisitions that can be accretive," he says.

Although high profile mergers and their related rumors such as Sanofi reported preparation of an $18.7 billion bid for the biotech firm Genzyme get most of the headlines, Harris says smaller deals drive the recovery. He adds that it may take a firm a little time after a deal is done to make the most of it, but that good deals are what allow companies to outpace the competition.

"What we've found is that M&A activity in the middle market seems to be a leading indicator on the rest of the economy," he says. "It goes down when the economy goes down, and goes up when the economy picks up. We're pretty bullish, because we're seeing incredible activity."

So far, there's been a pretty even distribution of mergers across most business sectors, but biotech and health care should see more activity because larger companies will have to buy smaller drug developers to revitalize their product pipelines, Roge says.

Technology companies are going to be a bit ahead of the pack for similar reasons. Cisco Systems and Apple have plenty of cash on hand, says Rich Peterson, director of valuation and risk strategies at Standard & Poor's.

He adds that although merger activity remains shy of its 2006 peak, when total deal value hit $1.5 trillion, the recent pickup is largely debt-free because acquisitions are being made from high cash balances.

Another factor that bodes well for the merger boom is that private equity firms, which have fewer leveraged buyouts, have raised huge amounts of money from big institutions and wealthy investors, accounting for an 11% increase in buyouts in the first half of this year, according to the Baird report. If they don't do deals, that money has to be returned.

While cash-rich companies could also buy back stock or increase their dividends, acquisitions are a clearer signal of how corporate leaders see longer-term prospects. For investors made queasy by the market s recent zig-zags, that should be a comfort, Peterson says.