Why does FM sound better than AM?

There's actually one important factor that's missing:

AM radio is limited in bandwidth. The audio is cutting off around 10kHz or such (that's why it kinda sounds like a telephone)

> To allow room for more stations on the mediumwave broadcast band in the United States, in June 1989 the FCC adopted a National Radio Systems Committee (NRSC) standard that limited maximum transmitted audio bandwidth to 10.2 kHz, limiting occupied bandwidth to 20.4 kHz

(from Wikipedia)

That's because AM has a bearer around 800 kHz, while FM a bearer around 100 MHz. I guess if doing AM at 100 MHz it wouldn't be a problem granting wider channels, too. But the problem that amplitude is more sensitive to noise wouldn't go away.