The market rally is at its most fragile point in months.

The S&P 500 (^GSPC) ended Friday below 5,000, its first close below that mark since late February. Meanwhile, the Nasdaq Composite (^IXIC) dropped more than 5% on the week, while the Dow held flat.

This week, critical readings on economic growth and inflation, as well as the start of Big Tech earnings, will determine if the malaise continues.

On the economic data side, the advanced reading of first quarter economic growth is slated for Thursday, followed by the March reading of the Personal Consumption Expenditures index, the Fed's preferred inflation gauge, on Friday.

In corporate news, a slew of S&P 500 companies are expected to report quarterly results headlined by Meta (META), Microsoft (MSFT), Alphabet (GOOGL, GOOG), Tesla (TSLA), and Chipotle (CMG).

The Fed's preferred inflation gauge

Several months of bumpy inflation readings have forced investors to scale back their projections for Federal Reserve interest rate cuts this year.

On Friday, Chicago Fed president Austan Goolsbee said "progress on inflation has stalled" when noting that it "makes sense" for the central bank to wait for more clarity on inflation's path.

This makes Friday's PCE reading all the more critical.

Economists expect "core" PCE clocked in at 2.7% in March from the previous year, down from February's 2.8% annual gain. Over the prior month, economists expect "core" PCE rose 0.3%, in line with last month's change.

"Should core PCE inflation come in around 0.25% [month-over-month] for March and April, the year-on-year reading will slow from 2.8% to 2.6%, giving the Fed cover to begin 'gradually' adjusting policy rates lower starting in June or July," Citi economist Andrew Hollenhorst wrote in a note to clients on April 17.

Growth update

Part of the reason investors had largely taken the repricing of Fed interest rate cuts in stride has been an increasingly positive economic backdrop. Throughout the first quarter, economists have been raising their projections for economic growth. Thursday will bring the first look at whether the US economy grew as fast as forecast in the first three months of this year.

Economists expect that the US economy grew at an annualized rate of 2.5% in the first quarter, lower than the 3.4% seen in the fourth quarter of 2023.

"Incoming data continue to point to ongoing economic resilience in an environment of higher rates," Bank of America US economist Michael Gapen wrote in a note to clients on Friday. "The consumer continues to remain strong. The economy has cooled modestly since the outsized 4.9% growth rate seen in 3Q, but what cooling there is has been gradual."

Earnings aren't impressing

Given the significant run-up in share price that some of the market rally's darlings have experienced this year, even better-than-expected earnings aren't moving the needle for stocks.

"The broader market is having digestion problems in and around this earnings season," Julian Emanuel, who leads Evercore ISI's equity, derivatives, and quantitative strategy, told Yahoo Finance.

This has broadly been seen across stock reactions the day following the release of quarterly results for the 65 S&P 500 companies that have reported results so far this season. Stocks that top Wall Street's estimates have risen 0.8% in the next trading session, slightly lower than the 0.9% average seen over the last few years, per Emanuel's research.

Meanwhile, companies that disappoint on both metrics are taking a bigger hit than normal, with the average stock falling 5.8% in the next trading action, compared to the usual 3.1% decline seen over the past five years.

"Given these extended valuations [in the S&P 500], even good news may not be good news, particularly in these names that have run as far as they have," Emanuel said.

Big Tech on deck

With earnings reports not satisfying investors, the baton will be passed to one of the strongest parts of the market over the past year: Big Tech.

Despite a sell-off across tech last week after disappointing results from chipmakers and Netflix (NFLX), earnings growth expectations are still sky-high for Meta, Microsoft, and Alphabet, which are all expected to report in the week ahead.

FactSet noted on Friday that these companies, along with Nvidia (NVDA) and Amazon (AMZN), are expected to have grown earnings by 64.3% in the first quarter. The other 495 companies are projected to see earnings decline by 6%.

Surging yields

Outside of earnings, investors will closely watch the economic data this week to see how it might shift movements in rising bond yields, which are becoming a pain point for investors again.

The 2-year Treasury yield shot up to 5% on Tuesday for the first time since the most recent stock market bottom in October 2023. The move came as Federal Reserve Chair Jerome Powell said it's taking "longer than expected" for inflation to fall to its 2% target.

And Evercore ISI's Emanuel believes this will be a key pain point for stocks, just as it was during a sell-off in the market last fall.

"The reason it might be more of the concern at this point is because of that implicit promise that markets have traded on of three [Fed rate] cuts dialed back," Emanuel said. "And if you look at it going back to March, I think it's a lot more than a coincidence the market rolled over from the highs literally precisely the moment the market started pricing in fewer than those three promised cuts."

Emanuel cautioned that it might be time to get defensive in the market because of this. He recommended exposure to sectors such as Health Care (XLV) and Consumer Staples (XLP) while also noting the roughly 5% that can be earned by holding cash in a money market account is still a viable portion of a portfolio.

Weekly Calendar

Monday

Economic data: Chicago Fed Nat Activity Index, March (+0.05 prior)

Earnings: Albertsons (ACI), Bank of Hawaii (BOH), Cleveland Cliffs (CLF), Nucor (NUE), SAP (SAP), Truist (TFC), Verizon (VZ), Zions Bancorporation (ZION)

Tuesday

Economic data: S&P Global US manufacturing PMI, April, preliminary (52.0 expected, 51.9 previously); S&P Global US services PMI, April, preliminary (52 expected, 51.9 previously); S&P Global US composite PMI, April, preliminary (52 expected, 52.1 previously); Richmond Fed Manufacturing Index, April (-11 prior); New home sales, March (670,000 expected, 662,000 previously); New home sales, month-over-month, March (1.2% expected, -0.3% previously)

Earnings: Freeport-McMoRan (FCX), General Electric (GE), General Motors (GM), Halliburton (HAL), JetBlue (JBLU), Lockheed Martin (LMT), Mattel (MAT), PepsiCo (PEP), Raytheon Technologies (RTX), Spotify (SPOT), Steel Dynamics (STLD), Tesla (TSLA), UPS (UPS), Texas Instruments (TXN), Visa (V)

Wednesday

Economic data: MBA Mortgage Applications, week ending April 19 (+3.3% prior); Durable Goods Orders, March preliminary (+2.5% expected, +1.3% prior)

Earnings: Meta Platforms (META), AT&T (T), Boeing (BA), Chipotle (CMG), Ford (F), Humana (HUM), ADP (ADP), eBay (EBAY), General Dynamics (GD), Hilton (HLT), IBM (IBM), O'Reilly Auto Parts (ORLY), ServiceNow (NOW), Viking Therapeutics (VKTX)

Thursday

Economic data: First quarter GDP, first estimate (+2.5% annualized rate expected, +3.4% previously); First quarter personal consumption, first estimate (+2.6% expected, 3.3% previously); Initial jobless claims, week ended, April 20 (215,000 expected, 212,000 previously); Pending home sales, month-over-month, March (+1.0% expected, +1.6% previously)

Earnings: Alphabet (GOOGL), Microsoft (MSFT), American Airlines (AAL), AstraZeneca (AZN), Caterpillar (CAT), Intel (INTC), Mobileye (MBLY), Roku (ROKU), Snap (SNAP), Royal Caribbean (RCL), Southwest (LUV), T-Mobile (TMUS)

Friday

Economic data: Personal income, month-over-month, March (+0.5% expected, +0.3% previously); Personal spending, month-over-month, March (+0.6% expected, +0.8% previously); PCE inflation, month-over-month, March (+0.3% expected, +0.3% previously); PCE inflation, year-over-year, March (+2.6% expected, +2.5% previously); "Core" PCE, month-over-month, March (+0.3% expected, +0.3% previously); "Core" PCE, year-over-year, March (+2.7% expected; +2.8% previously); University of Michigan consumer sentiment, April, final reading (77.9 expected, 77.9 previously)

Earnings: Exxon Mobil (XOM), Chevron (CVX), Charter Communications (CHTR), Colgate (CL)

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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