NEW YORK ( TheStreet) -- As the solar rally maintains momentum, the key for investors is to not run out ahead of the sector fundamentals. Demand is only half the equation. Recent projections that the solar market will grow this year after a 2011 crash have pulled solar stocks up to start 2012. Last week, Deutsche Bank became more constructive on solar stocks -- and Chinese module makers in particular -- based on the
potential for demand to exceed expectations led by Germany and China. Even noted solar bears like Gordon Johnson of Axiom Capital have removed sell ratings on solar stocks given the potential for surprise demand in 2012. On Tuesday, Maxim Group analyst Aaron Chew forecast 30 gigawatts of demand in 2012, with China surpassing Germany as the world's biggest market, installing 5.5GW of solar ion 2012. Yet key to Chew's more rosy demand outlook for solar -- and reservations voiced by other solar analysts about the change in sentiment on the beaten up sector -- is the caveat that earnings won't necessarily exceed low expectations, even as demand does. A key market mechanism in the solar sector is price and demand elasticity: As prices go lower, demand increases. Lower prices imply attractive project returns for investors in regions where feed-in tariffs are used to finance solar, like Germany and China, which finally implemented a national feed-in tariff in late 2011. Take Germany, the landmark FIT market. Double-digit returns used to be the norm in Germany, and that was because of generous FIT rates coupled with the lowering of solar module prices. Now, in a declining FIT environment -- Germany will slash feed-in tarriffs by 26% this year -- it's the cratering of prices in solar modules that will allow demand to pick up again in Germany. Maxim Group estimated investors can still generate a return of 7% from a solar project in Germany -- beating European bond returns has always been a primary driver for investors to finance solar. There is also the threat that the recent surge in Germany brought on by lower solar module prices will lead the government to finally implement a "hard cap" on solar in 2012. The threat of a hard cap -- even if it's only a threat -- is expected to result in a rush to install solar projects in the first half of the year.