What happened

Shares of Facebook (NASDAQ:FB) were cruising higher today, riding the coattails of rival Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), whose stock jumped nearly 10% on a better-than-expected earnings report. Since both Facebook and Alphabet's Google dominate the market for digital ads, investors viewed the good news for Alphabet as good news for Facebook, which will report its own first-quarter earnings report after hours today.

As of 11:29 a.m. EDT on Wednesday, Facebook shares were up 5.8%, while Alphabet shares had gained 8.4%. 

The "thumbs-up" sign at Facebook headquarters

Image source: Facebook.

So what

Alphabet said revenue in its first quarter rose 13%, down from 17% in the year-ago quarter, and adjusted profits declined. It also warned that the second quarter would be difficult, and said it would cut back on hiring and marketing spending. But investors seemed to think that the results and its outlook for the rest of the year were not as bad as feared, and that its advertising business, which is closely tied to the health of the global economy, will recover as macroeconomic conditions improve. 

Facebook has already told investors that its ad business was weakening in an update back in March, even as usage of many of its products has spiked as people around the world look for ways to connect online while they shelter in place. Investors may also be encouraged by reports from marketing firms Gupta Media and Socialbakers that show Facebook's ad business starting to recover in April.   

The surge in Alphabet shares today seems to indicate that Facebook and Alphabet were oversold on fears about a decline in the ad business, since both companies dominate their respective spheres of the digital world and aren't at risk of losing their leadership.

Now what

Looking ahead to Facebook's first-quarter earnings report this afternoon, analysts are expecting revenue to increase 15.9% to $17.5 billion, and for earnings per share to come in at $1.74, down from an adjusted total of $1.89 a year ago. Investors will also be focused on management commentary and guidance on the rest of the year to see how the company expects to perform over the duration of the crisis. Facebook stock has already bounced back 40% from its lows during the crisis, therefore much of its recovery may already be priced in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.