Factors That Move Stock Prices Up and Down in the U.S. Market

Stock prices change constantly in the market. These movements are driven by supply and demand, and there is no single formula that determines how a stock will be priced at any moment. In general, three broad forces influence stock price movements: fundamental factors, technical factors, and market sentiment.

Understanding how these forces work can help explain why stock prices rise or fall and why different investors often focus on different signals when making decisions.

Fundamental Factors Behind Stock Prices

In an efficient market, stock prices would be determined mainly by fundamentals. At a basic level, fundamentals come down to two core elements: an earnings base and a valuation multiple.

An earnings base, such as earnings per share (EPS)
A valuation multiple, such as the price-to-earnings (P/E) ratio

Owning a share of common stock gives an investor a claim on a company’s earnings. Earnings per share represent the return tied to that ownership. When an investor buys a stock, they are effectively buying a proportional share of a future stream of earnings.

Some of these earnings may be paid out as dividends, while the rest are retained and reinvested by the company. As a result, future earnings depend on both the current level of earnings and the expected growth of that earnings base.

The Earnings Base and Valuation Multiple

While EPS is a commonly used earnings measure, other approaches also exist. Some investors prefer cash-flow-based measures, such as free cash flow per share, as an alternative way to assess earnings power.

Different industries also rely on specialized metrics. For example, real estate investment trusts often use funds from operations, while mature companies may focus more on dividends per share.

The valuation multiple reflects expectations about the future. It represents the discounted present value of anticipated earnings. Two key factors shape this valuation:

Expected growth in the earnings base
The discount rate applied to future earnings

Higher expected growth generally supports a higher valuation multiple, while a higher discount rate leads to a lower multiple. The discount rate itself is influenced by perceived risk and inflation. Riskier stocks tend to carry higher discount rates, and higher inflation reduces the value of future earnings.

Technical Factors Influencing Stock Movements

Stock prices are not driven by fundamentals alone. Technical factors represent external conditions that affect supply and demand for a company’s shares. These factors often influence prices even when company fundamentals remain unchanged.

Inflation plays a major role from a technical perspective. Historically, lower inflation has been associated with higher valuation multiples, while higher inflation tends to compress valuations. Deflation, on the other hand, is usually negative for stocks because it signals weaker pricing power.

Stocks also tend to move with the broader market and with industry peers. Overall market conditions and sector trends can account for a large share of a stock’s price movement, sometimes outweighing company-specific performance.

Liquidity, Trends, and Market Conditions

Liquidity is another important technical factor. Highly liquid stocks, such as large-cap companies, respond quickly to news and attract consistent investor interest. Smaller companies often trade less frequently and may face a liquidity discount because they receive less attention.

Short-term trends can also influence prices. Stocks that are moving higher may attract additional demand as momentum builds, while others may revert toward longer-term averages. Although trends are easier to identify in hindsight, they remain a key part of market behavior.

The Role of News and Market Sentiment

News and unexpected developments can strongly affect investor sentiment. Political events, economic developments, mergers and acquisitions, earnings reports, and global events can all move stock prices, sometimes very quickly.

Market sentiment reflects the psychology of investors, both individually and collectively. Sentiment can keep prices elevated or depressed even when fundamentals suggest a different valuation. This behavior is often explained through concepts from behavioral finance.

Behavioral finance highlights how investors may overreact to certain information, respond more strongly to losses than gains, or persist in mistaken beliefs. These psychological factors help explain why markets are not always efficient.

The Bottom Line

Different investors focus on different factors when analyzing stock prices. Short-term traders often emphasize technical signals and market sentiment, while long-term investors typically prioritize fundamentals.

Although market sentiment and technical factors can drive prices in the short run, fundamentals tend to shape stock values over the long term. A balanced approach recognizes the influence of all three forces while understanding the uncertainty that comes with investing.