The Leaders of 2012's Stock Market Charge

When the stock market posts advances like we've seen so far in 2012, most investors end up being happy. But just because you're seeing some decent profits so far this year doesn't mean that you're making the most you could possibly make right now.

With earnings season for the fourth quarter of 2011 over for the most part, now's a good time to review exactly where the strength was during that period. By connecting good stock performance to strong earnings, you'll be able to make sure that the gains you've seen are backed by the fundamentals that are necessary for a stock's advance to last over the long haul.

A mixed season
With the market rising so much to begin the year, you might think that earnings season was an unqualified success. But as it turns out, the quarter overall was somewhat of a disappointment, according to figures from S&P Capital IQ.

Admittedly, most companies outpaced analyst expectations, with 288 of the 491 S&P 500 companies that had reported as of March 5 topping estimates versus just 143 misses. But the growth rate of those earnings was slower than had originally been expected as of last October when the quarter began. Earnings growth came in at just over 8%, versus initial projections for more than 14.5%. In addition, earnings for the S&P 500 fell sequentially from the previous two quarters.

Where the growth was
Drilling down on industries, information technology and energy had the biggest earnings growth, with rates of 17% and 13%, respectively. But in IT, a huge piece of that growth came from Apple (NAS: AAPL) and its blockbuster quarter chock-full of iPhones, iPads, and Mac computers; exclude the iDevice giant, and the sector's growth falls to less than 5%.

On the negative side, telecom and materials had the biggest earnings declines, with negative growth rates of -24% and -15%, respectively. Again, in telecom, a big piece of the drop is due to one stock: AT&T (NYS: T) , which took a huge charge after its planned merger with T-Mobile fell through.

Among the stocks seeing weakness, macroeconomic factors seem to play a big role. Dow Chemical (NYS: DOW) said that it expects Western Europe to remain a barrier to unfettered economic growth, even as a recovery starts to accelerate as the year progresses. Similarly, Eastman Chemical expects second-half growth as North America and Asia start to grow faster than Europe.

Meanwhile, companies in the stronger sectors point to some of the same factors as supportive of their businesses. Valero Energy (NYS: VLO) , for instance, likes the global growth in demand for energy products. And even though Europe presents some challenges, Valero see the refining industry starting to take steps to eliminate overcapacity in unprofitable markets, which is a long-term positive.

Where you'll find the most excitement is in homebuilder stocks. D.R. Horton (NYS: DHI) , for instance, said that a big boost in orders, backlogs, and completed contracts have it starting its fiscal 2012 on a strong footing. Other homebuilders, such as Lennar, are expressing similar optimism. When long-beaten-down industries start perking up, it makes it seem more likely that the recovery is for real.

What's next?
Yet perhaps what's most troubling about the latest earnings season is the fact that slightly fewer companies are providing guidance about the future. Moreover, bullish sentiment among those companies that have offered up future guidance is down across the board, and analysts have followed suit by cutting first-quarter earnings estimates for every sector except technology. Again, materials and telecom stocks are the primary victims.

Still, after a three-year bull run for the market and a huge earnings recovery since the market meltdown, it wouldn't be unreasonable for corporate earnings to pause briefly. Even if the first quarter of 2012 proves to be slower than some hope, it might just give investors a cheaper market in which to buy.

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At the time thisarticle was published Fool contributor Dan Caplinger yells "Charge!" with the best of them. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won the mechanical-bull contest at Gilley's in 1977 and has never looked back since.

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