Stocks have mostly been performing well owing to the strong earnings reports from Alphabet, GM and AMD. In midday trading, the Dow Jones Industrial Average gained 65 points, or 0.2%, after the index rose 273 points on Tuesday, closing at 35,405. The S&P 500 gained 0.5%, with the technology-heavy Nasdaq Composite gaining by 0.1%.
The stock market seems to be moving higher due to the positive earnings that have been released so far, which hadn’t been the case at the beginning of the earnings season. The S&P500 has gained almost 3% this week alone, including Wednesday’s early increment.
Google parent company- Alphabet (ticker: GOOGL) stock climbed nearly 8.2% after the company reported a profit of $30.69 a share, beating estimates of $27.68 a share on sales of $75.3 billion, a step higher than expectations that were set at $72.3 billion. Another factor that boosted the company’s stock was the news that it would be splitting its stock.
Advanced Micro Devices (ticker: AMD) stock gained by 5.4% after the chipmaker reported a profit of 92 cents a share, surpassing estimates of 70 cents a share, on sales of $4.8 billion, higher than expectations of $4.5billion.
The S&P 500 and the Nasdaq rose on the back of tech stocks, making a large percentage of the indexes aggregate market capitalization. For instance, Google and AMD have a combined market capitalization of roughly $2 trillion, which is around 5% of the S&P 500’s total market value.
The gains reflect a much-needed breath of fresh air, especially after all the lows the market has been through this year alone. By Monday, companies that beat earnings expectations had witnessed their stocks drop by 0.4% on average.
In aggregate, earnings on the S&P 500 have been surpassing expectations by about 4%, with almost three-quarters of the companies beating by any margin, according to Credit Suisse.
With the market reaction, it seems that stocks were too expensive. Future profits of firm’s had already been reflected by share price, so the market demanded an even larger earnings outperformance to lift prices.
At the moment, though, stocks aren’t as expensive. The S&P 500 has dropped 12% on an intraday basis from its high point in January; the S&P 500’s aggregate forward earnings multiple is down from just 21 times to just under 20 times. This is because the Federal Reserve is expected to raise interest rates and reduce the size of its balance sheet to fight inflation. Both moves are leading to long-dated bond yields to rise, which makes future profits less valuable.
Tuesday, companies that surpassed earnings estimates in their Monday evening and Tuesday morning reports saw their stocks rise by 3.4% on average, according to Refinitiv data.