By David Randall

NEW YORK (Reuters) – The U.S. stock market rally will be tested next week with earnings from chipmaker Nvidia (NASDAQ:), whose meteoric run has led markets into 2024.

The stock has recovered from a sharp decline the company suffered after concerns about the US economy led to a sell-off earlier this month, and is now close to a new record high.

Nvidia, whose chips are widely seen as the gold standard in artificial intelligence, has been at the forefront of that rally, jumping more than 30% from recent lows. The stock is up about 150% year-to-date, accounting for about a quarter of the S&P 500’s 17% year-to-date gain.

The company’s Aug. 28 earnings report, along with its forecast of whether corporate investment in AI will continue, could be a major turning point for market sentiment heading into what has historically been a volatile time of year. The S&P 500 has fallen an average of 0.78% in September since World War II, its worst monthly performance, according to CFRA data.

“Nvidia is the zeitgeist stock today,” said Mike Smith, a portfolio manager at Allspring Global Investments, which holds the company’s stock. “You can think of their wins four times a year as the Super Bowl.”

Some investors are bracing for fireworks. Traders are pricing in about a 10.3% swing in Nvidia’s stock the day after the company reports earnings, according to data from options analysis firm ORATS. That’s bigger than the expected move ahead of an Nvidia report over the past three years and well above the stock’s average post-earnings move of 8.1% over the same period, ORATS data shows.

The results come at the end of an earnings season in which investors have taken a less forgiving view of big tech companies whose profits haven’t justified their high valuations or excessive spending on AI. Examples include Microsoft (NASDAQ: ), Tesla (NASDAQ: ) and Alphabet (NASDAQ: ), whose shares have all fallen since their July reports.

Nvidia’s valuations have also risen, with shares up about 750% since the start of 2023, making it the world’s third-most valuable company as of Thursday and drawing comparisons to the dotcom bubble of more than two decades ago. The company’s shares are trading at about 37 times forward 12-month earnings, compared to a 20-year average of 29 times, according to LSEG Datastream.

Market sentiment could hinge on Nvidia’s guidance as much as its results. Evidence that it’s seeing robust demand will be a bullish sign that companies are continuing to invest rather than pulling back in anticipation of an economic slowdown, said Matt Stucky, chief portfolio manager, equities, at Northwestern (NASDAQ:) Mutual Wealth Management.

Nvidia’s “connection to the largest companies in the U.S. stock market makes this a must-see event,” he said. “The biggest thing investors want to know is whether there is sustainability and what demand looks like in ’25 and ’26,” he said.

The stance of monetary policy and the U.S. economy are also important to investors. In a speech Friday morning in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell explicitly endorsed rate cuts, saying that further cooling of the labor market would be unwelcome.

Investors will be watching U.S. labor market data on Sept. 6 to see if last month’s unexpected decline in employment has continued into August. Any signs that employment continues to weaken could reignite the recession fears that rocked markets earlier this month.

A neck-and-neck race between Vice President Kamala Harris, a Democrat, and Republican former President Donald Trump could also create uncertainty in the market in the coming weeks.

According to John Belton, portfolio manager at Gabelli Funds, which owns shares of the chipmaker, the surge in stock prices in August could make it difficult for markets to make much progress in the near term, even if Nvidia’s earnings impress Wall Street.

The S&P 500 trades at 21 times expected earnings, well above its long-term average of 15.7.

“The stock market as a whole is still trading at high valuations, so the bar is high,” Belton said.