Following Federal Reserve Chairman Powell's indication of a September rate cut, market sentiment has found some relief. However, US equities now face a new challenge: evaluating whether the primary driver behind recent years' rally - the fervent enthusiasm for artificial intelligence - still has momentum.

This week, the stock market will witness its most significant earnings announcement as NVIDIA (NVDA.US) reports its latest quarterly results after Wednesday's close (Thursday morning).

Last Friday, markets opened with subdued sentiment, with the S&P 500 initially poised for a fifth consecutive day of decline - potentially marking its longest losing streak since January. Wall Street traders had been reducing bets on imminent Fed rate cuts, but Powell's remarks alleviated these concerns, propelling the S&P 500 to its best single-day performance since May, leaving it just under two points from its all-time high.

Regarding the AI boom, traders hope NVIDIA can ease concerns about AI sector investments and demonstrate that recent market gains aren't merely a technology stock bubble phenomenon.

According to Eric Beiley, Executive Director of Wealth Management at Steward Partners: "NVIDIA is crucial to the stock market because any additional momentum enhancement could ignite this market and make it boil over. The potential risk lies in the possibility that if these AI investments fail to deliver results and prospects appear cautious, this could lead to market volatility." He holds the company's stock but has begun adding hedging measures following significant price appreciation.

NVIDIA holds the largest weight in the S&P 500 at nearly 8%, and its central position in AI development makes it a market bellwether. This tech giant's products are ubiquitous, with 40% of its revenue coming from Meta (META.US), Microsoft (MSFT.US), Alphabet (GOOGL.US), and Amazon (AMZN.US) - all ranking among the S&P 500's top ten weighted stocks.

All these factors make NVIDIA's quarterly earnings and future outlook a significant market event.

**Mounting Pressure**

Kim Forrest, Chief Investment Officer at Bokeh Capital Partners, stated: "The pressure remains very high. Much of the market's gains over the past few years have been built on the foundation of NVIDIA and its partners. So I'm somewhat concerned."

This doesn't mean investors are completely in the dark about NVIDIA's performance. Early in earnings season, most of its major clients reported relatively solid results, including commitments to increase previously invested billions in capital expenditure. This bodes well for the chip manufacturer's profitability and prospects.

Art Hogan, Chief Market Strategist at B. Riley Wealth, noted: "Typically, when people start questioning tech stocks, NVIDIA reports within two weeks - this pattern is quite common. NVIDIA could potentially become a positive driving force."

On Friday, NVIDIA's stock rose 1.7%, ending a three-day decline that marked its longest losing streak in a month. The stock currently sits less than 3% below its all-time high reached in early August.

Wall Street analysts expect NVIDIA's adjusted earnings per share for the second fiscal quarter to reach $1.01, representing a 48% increase year-over-year, with revenue exceeding $46 billion, up 54% from the same period last year.

Naturally, a strong report could drive NVIDIA's stock higher and boost the broader market, while any misstep - whether actual or misinterpreted - could halt this rally and bring significant downward pressure to the market. Options traders have factored in potential stock movements of 6% in either direction.

While lower interest rates should benefit growth stocks like NVIDIA, they cannot resolve issues stemming from excessive market valuations. The S&P 500 trades at approximately 22 times forward earnings, above its 10-year average of 19 times. NVIDIA trades at about 34 times its composite forward P/E ratio, below its 5-year average of 39 times.

**High Valuation Risks**

Beiley stated: "Valuations have become alarmingly high. However, investors continue to turn a blind eye, maintaining expectations that these AI sector darlings will continue delivering excellent performance."

A significant issue facing NVIDIA involves whether its products can be sold in the Chinese market. The Trump administration recently approved NVIDIA and AMD (AMD.US) to resume sales in China, but with the condition that they remit 15% of sales to the US government. However, subsequent reports indicated that China discouraged Chinese companies from using NVIDIA's H20 chips specifically designed for Chinese sales, prompting the company to instruct suppliers to halt production.

Michael O'Rourke, Chief Market Strategist at Jonestrading, explained: "The market's previous expectation was that NVIDIA would eventually be allowed back into the Chinese market, but now the issue is that the US government claims it allowed H20 sales because the chips are nearly obsolete, and China is dissatisfied with this. China also worries that the US might use NVIDIA's chips to plant backdoors in Chinese technology."

Wall Street analysts have long been bullish on NVIDIA stock, believing there's currently no cause for concern. Just in the past week alone, at least 9 of the 79 analysts covering the company raised their target prices based on positive expectations for the quarterly report. The average target price exceeds $194, providing approximately 9% upside potential from Friday's closing price of $178.

Of course, NVIDIA's report isn't the only factor that could trigger market volatility this week. Traders will also closely monitor inflation data in Friday's PCE release. However, concerns about potential selling triggered by the company's performance are dominating market sentiment.

Beiley concluded: "I'm worried. The current economy faces tariff pressures, and employment growth is showing signs of slowing. Therefore, these high-priced stocks could easily experience significant declines if negative news emerges. The entire market is also susceptible to concentration risk."