NEW YORK, July 5 (Reuters) - Hopes that the U.S. stocks

rally will broaden beyond megacaps like Nvidia ( NVDA ) will be

tested in coming weeks as investors learn whether profit growth

from other companies is starting to catch up with that of the

tech-related leaders.

The S&P 500 has rallied 16% so far in 2024, driven by

a handful of massive stocks poised to benefit from emerging

artificial intelligence technology. Only 24% of stocks in the

S&P 500 outperformed the index in the first half, the

third-narrowest six-month period since 1986, according to BofA

Global Research strategists.

Meanwhile, the equal-weight S&P 500 -- a proxy for

the average stock -- is only up around 4% this year. As of

Tuesday, about 40% of S&P 500 components were down for the year.

Second-quarter earnings kick off next week with major

banks including JPMorgan ( JPM ) and Citigroup ( C/PN ) reporting

on July 12. Investors will be watching whether profits from

other companies are catching up with the "Magnificent 7":

Nvidia ( NVDA ), Microsoft ( MSFT ), Apple ( AAPL ), Alphabet,

Amazon ( AMZN ), Meta Platforms ( META ) and Tesla,

many of which rebounded from struggles in 2022.

Investors generally view a narrow rally as more fragile,

because weakness in just a few big stocks could sink indexes,

but some hope gains will spread during the second half.

More companies are projected to post improved earnings as

many investors expect the economy to navigate a soft landing,

which could boost stocks trading at more moderate valuations

than market leaders.

"If we're looking for a catalyst to have broader

participation in this rally this year, the second-quarter

earnings reporting season may well be the start of that," said

Art Hogan, chief market strategist at B Riley Wealth.

The S&P 500 is trading at about 21 times forward

earnings estimates, but if the top 10 stocks by market value are

excluded that figure drops to 16.5 on average for the rest of

the index, Hogan said.

In a further sign of the narrow rally, the information

technology and communication services

sectors, which include most of the Magnificent 7, are the only

two of 11 S&P 500 sectors to outperform the broader index this

year.

Earnings among the Magnificent 7 rose 51.8% year-on-year in

the first quarter compared to 1.3% earnings growth for the rest

of the S&P 500, according to Tajinder Dhillon, senior research

analyst at LSEG.

That gap is expected to shrink, with forecasts for

Magnificent 7 year-on-year earnings rising 29.7% in the second

quarter and earnings among the rest of the index up 7.2%,

according to LSEG.

"We think greater balance in profitability could lead to

broader market participation in the coming quarters," Chris

Haverland, global equity strategist with the Wells Fargo

Investment Institute (WFII), said in a note on Tuesday.

The WFII suggests investors trim gains in the technology and

communication services sectors to take advantage of weakness in

energy, healthcare, industrials and materials.

Later in the year, the Magnificent 7's profit advantage is

expected to diminish further. The group's year-on-year earnings

growth is expected to be 17.4% in the third quarter and 18.3% in

the fourth. That compares with rest-of-index earnings growth of

6.8% in the third quarter and 13.9% in the fourth.

"We anticipate that we're going to have nearly all sectors

of the S&P participating in earnings growth in 2024," said Katie

Nixon, chief investment officer for Northern Trust Wealth

Management.

Not everyone is convinced that other groups are poised to

catch up, as AI remains a dominant theme. Robert Pavlik, senior

portfolio manager at Dakota Wealth Management, said he had

doubts about earnings growth meeting expectations, due to weak

consumer spending, sticky inflation and other concerning

economic indicators.

Still, in coming days, investors could get a clearer view of

the economy's health and when the Federal Reserve will start

cutting interest rates, which could also trigger broader market

gains. Fed Chair Jerome Powell is due to testify before Congress

on Tuesday, while Thursday's release of the monthly consumer

price index provides a crucial look at inflation.