When a company reports increased quarterly earnings, that means earnings typically the first two net income or profits. Increased quarterly earnings, therefore, means the company has been more profitable than the last quarter. So, theoretically if a company's profitability increased from the last quarter, the stock price of the company should increase because the market will expect the company is doing well and even the future quarters are going to be good and hence the stock price should increase.
Nov 01 2013 11:36 AM
Also another reason for the stock price to increase is that all companies in the stock market trade on what is called a P/E multiple - Price/Earnings multiple. So, if a company has a P/E multiple of 10 times, then the price of the stock should automatically be roughly 10 times the earnings. So, the earnings is higher....the stock price is 10 times its earnings of automatically the enumerative is higher and hence the price of the stock will be higher.
However, there will be situations especially in the high growth industries like technology, where the market is expecting the company to perform extremely that. Maybe the company reported 25% growth in quarterly earnings but maybe the market expected the company to grow at 35% or even 30%. So even though the company's quarterly earnings grew by 25% from the previous quarter, it is still underperformed the expectations of the market which was expecting 30% or 35%. So, since the company's earnings fell below estimates, market estimates, the market people will start selling shares of the company thinking that it is not going to do well in the future quarters, and hence the stock price of the company will decrease.