The rally in U.S. stocks faces a major test (…) given the earnings of chipmaker giant Nvidia NVDA.O, whose stellar run has driven markets throughout 2024.

The S&P 500 .SPX has pared a sharp decline after economic concerns in the U.S. sparked a sell-off earlier this month and is back near a new all-time high.

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

The company’s Aug. 28 earnings report, along with whether it expects further corporate investment in AI, could be a key turning point for market sentiment heading into this historically volatile time of year. The S&P 500 has fallen an average of 0.78 percent in September since World War II, the worst monthly performance, according to CFRA data.

“Nvidia is the stock of the zeitgeist today,” says Mike Smith, 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 like the Super Bowl.”

Some investors are bracing for fireworks. Traders are pricing in a price swing of about 10.3 percent for the day after the results are released, according to data from options analytics firm ORATS. That’s more than the expected price swing before any Nvidia report over the past three years and significantly more than the stock’s average post-results swing of 8.1 percent over the same period, ORATS data shows.

The results come at the end of an earnings season in which investors have been less forgiving of big technology companies whose profits could not justify high valuations or huge spending on AI. Examples include Microsoft MSFT.O, Tesla TSLA.O and Alphabet GOOGL.O, whose shares have all fallen since their July reports.

Nvidia’s valuations have also risen. The stock has risen about 750% since the start of 2023, making it the third most valuable company in the world as of Thursday, while also drawing comparisons to the dot-com bubble more than two decades ago. The company’s shares trade at 37 times expected earnings over the next 12 months, compared to a 20-year average of 29, according to LSEG Datastream.

Market sentiment could depend as much on Nvidia’s forecasts as its results. Signs of robust demand are an optimistic sign that companies are continuing to invest and are not pulling back in anticipation of an economic slowdown, said Matt Stucky, chief equity portfolio manager at Northwestern Mutual Wealth Management.

Nvidia’s “connection to the biggest companies in the U.S. stock market makes this an event to definitely keep an eye on,” he said. “The main thing investors want to know is whether there is sustainability and what demand will look like in 2025 and 2026,” he said.

The development of monetary policy and the US economy is also of great importance for investors. In a speech on Friday morning in Jackson Hole, Wyoming, the chairman of the US Federal Reserve, Jerome Powell, explicitly spoke out in favor of interest rate cuts and said that a further slowdown in the labor market would be undesirable.

Investors will be closely watching U.S. jobs data on Sept. 6 to see if last month’s unexpected decline in employment continued into August. Signs that jobs numbers are continuing to decline could revive the recession fears that rocked markets earlier this month.

A close presidential race between Democratic Vice President Kamala Harris and Republican former President Donald Trump could also cause uncertainty in the markets in the coming weeks.

The August surge could make it difficult for markets to make any greater progress in the short term, even if Nvidia’s earnings impress Wall Street, said John Belton, portfolio manager at Gabelli Funds, which holds shares in the chipmaker.

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

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