Will Investors Yahoo?

Earnings season officially kicked off tonight with better than expected results from Dow component Alcoa , but for the tech sector, earnings season won’t begin until Yahoo reports tomorrow night.

Yahoo has led a resurgent Internet sector with a 115% year-to-date return and an earnings rebound that has been equally impressive. Yahoo is expected to report year-over-year earnings growth of 167% and revenue growth of 40%, and analysts appear to expect the company to exceed those estimates.

Media companies have long been Wall Street darlings because of their high free cash flow and low capital needs, and Yahoo could be joining that group now that its focus is on profits instead of eyeballs. Indeed, Yahoo made one top-performing portfolio this year because of its free cash flow.

At about 100 times this year’s estimates, Yahoo’s valuation is getting stretched. But just wait a day. It could get even more stretched.

Tech stocks and transportation stocks led the market higher Tuesday on EMC’s acquisition of Legato and Yellow Corp.’s acquisition of Roadway . Investors took the buyouts as a sign that business confidence may be returning and that some stocks remain attractive despite a four-month rally.

The Nasdaq surged 25 to 1746, the S&P 500 rose 3 to 1007, and the Dow added 6 to 9223. Volume rose to 1.54 billion shares on the NYSE, and 2 billion on the Nasdaq. Advancers led 18-14 on the NYSE, and 20-10 on the Nasdaq. Upside volume was 59% on the NYSE, and 77% on the Nasdaq. New highs-new lows were 359-8 on the NYSE, and 445-5 on the Nasdaq.

After the close, Microsoft announced that it is replacing its stock option program with stock grants.

During the day, Websense soared 30% after raising guidance.

Sohu.com gained 5% after beating estimates.

Extreme plunged 19% on the resignation of its CFO.

Microstrategy gained 10% on a deal with the U.S. Postal Service.

Overture surged 9% after stealing business from Google.

Proxim plunged 25% on a warning.

WebEx gained 5% on an acquisition.

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