NEW YORK, April 5 (Reuters) - The U.S. stock market is

the most expensive it has been in around two years. Its

valuation could be put to the test as companies report earnings

in coming weeks.

The S&P 500 is up more than 9% year-to-date,

following its strongest first-quarter performance since 2019.

But the bar may be rising for stocks to keep advancing at that

pace, increasing pressure on companies to deliver strong

results.

The benchmark index trades at 20.7 times its estimated

earnings for the next 12 months, near a more than two-year high

of 21.2 hit in late March, according to LSEG Datastream.

Unremarkable earnings growth could give investors less reason to

hold onto stocks, at a time when elevated yields on Treasuries

bolster the attractiveness of bonds.

Investors will also listen for companies' views on the

economy and inflation, to gauge whether the so-called Goldilocks

environment of resilient growth and cooling consumer prices can

continue.

Signs of stubborn inflation have diminished expectations

in recent weeks for how deeply the Federal Reserve will cut

rates this year. Stocks rose after another

stronger-than-expected employment report on Friday.

"If we're going to continue to make significant gains in the

stock market, we have to not just meet, but probably exceed ...

what those estimates are for earnings," said Yung-Yu Ma, chief

investment officer at BMO Wealth Management.

Delta Air Lines ( DAL ), BlackRock ( BLK ), and JPMorgan

Chase & Co ( JPM ) are among the companies scheduled to release

their first quarter results next week. Investors will also be

watching for March U.S. consumer price data, expected on April

10.

Analysts expect to see earnings growth of 5% in the first

quarter, according to LSEG data. That would be the lowest since

the second quarter of 2023. They expect margins to be squeezed

by high interest rates, rising commodity costs, and falling

corporate pricing power due to slowing inflation. Earnings grew

by 10.1% in the fourth quarter of 2023.

The results of megacaps such as Nvidia ( NVDA ), Meta

Platforms ( META ) and Microsoft ( MSFT ) could be key for

investor sentiment, following a divergence in the share price

performance of the so-called Magnificent Seven stocks that led

markets higher last year.

Chipmaker Nvidia, for instance, is up 78% in 2024, while

Tesla shares have fallen over 30% due to concerns over

its margins and demand. The electric vehicle maker has canceled

the long-promised inexpensive car that investors have been

counting on to drive its growth into a mass-market automaker,

Reuters reported on Friday.

"These businesses now need to justify these high

valuations," said Bryant VanCronkhite, a portfolio manager at

Allspring Global Investments. "The market is looking for every

company to talk about their demand drivers and articulate what

they see coming ahead."

At the same time, investors will be watching whether

evidence of continuing strength in the U.S. economy flows

through to rising revenues and earnings for industrial, energy,

and other sectors that are closely tied to growth. Shares of

these companies have largely performed well this year in a rally

that has spread beyond technology and growth names.

"If the U.S. economy starts to bounce from here you want

exposure to industries with real economy end-markets," said

Justin Menne, head of US equities for Harbor Capital Advisors,

who is overweight shares of energy companies.

Liz Ann Sonders, chief investment strategist at Charles

Schwab, said she expects "punishment" of companies that fail to

meet expectations.

"What will be critical beyond the beat rate will be the

margin stories," she said.

As always, the Fed will loom large in investors' minds. A

robust earnings season and expectations of growing price

pressures from companies could be seen as further evidence that

the economy is too strong for the central bank to cut rates

without risking an inflationary rebound.

March U.S. employment numbers backed up that narrative.

Nonfarm payrolls increased by 303,000 jobs last month, far above

expectations. Futures markets show investors expect the Fed to

deliver around 70 basis points of rate cuts this year, compared

to 150 basis points they had factored in January.

Yet weaker earnings could indicate cracks in the economy's

strength. Some investors believe that could boost the case for

the Fed to ease monetary policy.

"That bad news could actually be good news for the market

because it leads to those Fed rate cuts that everyone is hoping

for," said Kevin Mahn, chief investment officer at Hennion &

Walsh Asset Management.