Encouraging earnings news from Wall Street overcame concerns emanating from Europe on Friday. The Nasdaq Composite added 1.4% during the week. The S&P 500 gained 0.9%, while the Dow Jones Industrial Average rose 0.5% during the same time.

Europe had actually helped stock prices earlier in the week on the heels of successful Italian and Spanish bond auctions. These countries were able to raise more money than anticipated at rates that were much lower than in recent months. The strong auctions indicate that investors have increasing confidence that Italy and Spain will be able to meet their obligations. Friday was a different story after Standard and Poor’s downgraded the debt of several countries, including France and Austria who lost their AAA credit rating. In addition, Greece is at impasse with private investors over the amount of loss they will have to take in order for Greece to restructure its debt.

The events in Europe dented stocks’ gains for the week, but investors as a whole took the discouraging news out of Europe rather well.. The reason for the optimism came from Alcoa, the first Dow component to report earnings for the season. The aluminum company forecast strong demand and favorable pricing in 2012, which would be in-line with an improving economy. Of course, Alcoa is just one company, but we will soon find out if their view is the prevailing opinion or an outlier. Approximately one quarter of the S&P 500 will be reporting earnings this week, so there will be plenty of other results and forecasts to digest in the immediate future.

There is a good chance that there will be stock market support from the world economy that does not include Europe. China announced today that its economy expanded at it slowest pace in 2 ½ years. This means it is highly likely the Chinese central bank will pump liquidity into the market in order to spur higher economic growth.

This week we also get another large dose of domestic economic data. It is expected to show the economy is continuing to gain traction and hopefully that will translate into expanding corporate profitability and improved stock market performance. Stock prices have steadily risen over the past two months. However, valuations are still very reasonable, especially when compared to the past two decades. Uncertainty in Europe is keeping a lid on valuations, but if stock prices can simply track their underlying earnings investors should be well compensated in 2012. Upside earnings surprises and more clarity regarding Europe could leverage investor gains. Again, patience will be required but should be rewarded.