"Volatility carried the day," Jeffrey Schwarte, a money manager who helps oversee about $231 billion in Des Moines, Iowa, at Principal Global Investors, said in a telephone interview on Dec. 29. "The market was very top-down, looking at the macro drivers, and assumed everybody's going to have poor earnings going forward. That's certainly not the case from our perspective."

Stock advisers are counting on the same things to spur this year's gain as they did in 2011: profits that are exceeding analyst estimates, record low interest rates and prospects for an expanding economy. The S&P 500 rallied as much as 102 percent from its low in March 2009.

Stock Valuations

The benchmark index tumbled 19 percent from its April high through Oct. 3 as more than $3 trillion was wiped from U.S. equities. For the year, the S&P 500 traded at an average price- earnings ratio of 14.1, compared with the five-decade mean of 16.4. The measure is trading at 11.6 times forecasts for 2012 profits, with analysts calling for a 9.7 percent gain to $108.38 a share for S&P 500 earnings, the highest level ever.

Earnings multiples will contract in 2012 as investors concerned about the outcome of the U.S. presidential election, growth in China and Europe's debt crisis refuse to pay more for profits, according to Parker, U.S. equity strategist at Morgan Stanley. Last year's 5.5 percent gain in the Dow Jones Industrial Average compares with an average of 12 percent in years prior to elections since the measure's creation in 1896, data compiled by Bloomberg show.

"You don't want to pay a higher multiple for today's earnings knowing that there's this negative skew as to what can happen," he said in a telephone interview on Dec. 28. "About half of getting a stock right these days seems to come from bottom-up issues and half seems to come from macro issues."

Profit Estimates

Parker predicted at the beginning of 2011 the S&P 500 would end the year at 1,238, 1.6 percent from the close. His forecast was the lowest in a survey of 12 strategists' estimates compiled by Bloomberg and compared with the average projection of 1,371.

Bulls say rising profits mean the S&P 500's earnings yield will expand, fueling gains in prices. Strategists are more pessimistic than equity analysts about how much earnings will climb in 2012, forecasting $102.31 a share. That would still represent the highest level ever.

Brian Belski, Oppenheimer & Co.'s New York-based chief investment strategist, said he's never seen investors more influenced by the economy and government than now. That's a bullish signal because it means there are more people who may change their minds and buy stocks in 2012, he said.