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        How Earnings Affect Stock Price?
        Views 60K Contents 223

        Relationship between Earnings and Stock Price

        Earnings and stock price have a direct relation with each other. It can easily be safe to assume that if the earnings are good and the stock is undervalued, the stock price will go up in future. similar can be said about the low earnings and an overvalued stock.
        The reason earnings are directly related to the stock price is because, if the stock price is overvalued, then sometimes organizations has to cut their employee salaries, bonuses or sometimes their jobs to cover up the appropriate earnings for their overvalued stock price. This was seen after the pandemic hit, people lost jobs and most quit. Which affected the S&P in a direct way as low workers caused the industries to have higher earnings and stock prices to go up.

        However, after pandemic also people started leaving jobs(due to other reasons) and now causing the even higher earnings for companies to get their stock up now. Currently, the US is suffering one of the greatest quits in jobs of the history.

        But I expect the companies won't be able to post greater earnings than this. As we know, this also follows the "laffer curve".
        with one side being completely employed and posting lower earnings as explained below in the graph.
        Relationship between Earnings and Stock Price
        The point t* denotes the optimum level of employees to achieve the maximum earnings which we are looking at now, in the form of higher stock prices(direct relation). However, if this continues we can be looking at the declining slope of earnings due to low employees and lower production caused by that. This will cause the stock prices to go down in near future.


        Another factor to consider for the earnings and the stock price is the market capture. This market capture is caused by greater innovation, increased efficiency and better marketing by the organization. For example AMD has improved their microprocessors in a way that they contain more transistors per chip, performs greater operations per cycle, consumes less energy and more resistant to heat. The similar processors of the similar or higher price range of Intel are lower in benchmark than the AMD processors. Thus causing AMD to capture the microprocessor market(more sales more earnings) and posting higher earnings every year. Now, AMD is also competing against Nvidia in graphics unit market. A recent research shows that AMD graphics cards are more efficient in cryptocurrency mining compared to the Nvidia cards. This shows a promising future for increase in earnings by AMD and causing the stock to rise even further.
        Relationship between Earnings and Stock Price
        Source: investopedia
        The Graph shows the increase in earnings of AMD that causes the stock price to go up. With few exceptions of news affecting stock price, but later adjusted thus following the earnings only in long run.
        Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only. Read more
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