NEW YORK, Aug 23 (Reuters) - The rally in U.S. stocks

faces an important test next week with earnings from chipmaking

giant Nvidia ( NVDA ), whose blistering run has powered markets

throughout 2024.

The S&P 500 has pared a sharp drop it suffered after

U.S. economic worries contributed to a sell-off at the beginning

of the month and again stands near a fresh all-time high.

Nvidia ( NVDA ), whose chips are widely seen as the gold standard in

artificial intelligence, has been at the forefront of that

rally, jumping by more than 30% since its recent lows. The stock

is up some 150% year-to-date, accounting for around a quarter of

the S&P 500's 17% year-to-date gain.

The company's Aug. 28 earnings report, coupled with guidance

on whether it expects corporate investments in AI to continue,

could be a key inflection point for market sentiment heading

into what is historically a volatile time of the year. The S&P

500 has fallen in September by an average of 0.78% since World

War Two, the worst performance of any month, according to CFRA

data.

"Nvidia ( NVDA ) is the zeitgeist stock today," said Mike Smith, a

portfolio manager at Allspring Global Investments, which holds

the company's shares in its portfolios. "You can think of their

earnings four times a year as the Super Bowl."

Some investors are getting ready for fireworks. Traders are

pricing in a swing of around 10.3% in Nvidia's ( NVDA ) shares the day

after the company reports earnings, according to data from

options analytic firm ORATS. That's larger than the expected

move ahead of any Nvidia ( NVDA ) report over the last three years and

well above the stock's average post-earnings move of 8.1% over

that same period, ORATS data showed.

The results come at the end of an earnings season during

which investors have taken a less forgiving view of big tech

companies whose earnings failed to justify rich valuations or

prodigious spending on AI. Examples include Microsoft ( MSFT ),

Tesla and Alphabet, whose shares are all down

since their July reports.

Nvidia's ( NVDA ) valuations have also climbed, as the stock soared

about 750% since the start of 2023, making it the world's

third-most valuable company as of Thursday, while also drawing

comparisons to the dotcom bubble of more than two decades ago.

The company's shares trade at about 37 times forward 12-month

earnings estimates, compared with a 20-year average of 29 times,

according to LSEG Datastream.

Market sentiment could depend as much on Nvidia's ( NVDA ) guidance

as its results. Evidence that it sees robust demand will be a

bullish sign that companies are continuing to invest rather than

pull back in anticipation of an economic slowdown, said Matt

Stucky, chief portfolio manager, equities, at Northwestern

Mutual Wealth Management.

Nvidia's ( NVDA ) "connection to the largest companies in the U.S.

stock market makes this a must-watch event," he said. "The

biggest piece that investors want to know is whether there is

sustainability and what demand will look like in '25 and '26,"

he said.

The trajectory of monetary policy and the U.S. economy also

looms large for investors. In a Friday morning speech in Jackson

Hole, Wyoming, Federal Reserve Chair Jerome Powell offered an

explicit endorsement of interest rate cuts, saying further

cooling in the job market would be unwelcome.

Investors will be watching U.S. labor market data on Sept. 6

for evidence of whether last month's unexpected downshift in

employment carried over to August. Signs that employment is

continuing to weaken could bring back the recession fears that

rocked markets earlier this month.

A tight presidential race between Vice President Kamala

Harris, a Democrat, and Republican former President Donald Trump

may also whip up market uncertainty in the weeks ahead.

The August surge in stocks may make it difficult for markets

to make much more headway in the near term even if Nvidia's ( NVDA )

earnings impress Wall Street, said John Belton, a portfolio

manager at Gabelli Funds, which holds shares of the chipmaker.

The S&P 500 trades at 21 times expected earnings, far above

its long-term average of 15.7.

"The stock market as a whole is still trading at stretched

valuations so the bar remains high," Belton said.