Investors will assess data on new and existing home sales that could point to whether the battered housing sector has bottomed. They will also keep an eye out for profit forecasts or warnings as the second quarter draws to a close.
"The kamikazes who ran the market up three months ago have now paused ... I'm in a situation where I say, 'prove it to me.' I want to see a trend where it really is a little bit better," said Cummins Catherwood, managing director at Boenning and Scattergood in West Conshohocken, Pennsylvania.
The Fed is widely expected to leave rates unchanged after its two-day meeting ends Wednesday, but investors will check the statement closely for clues on the central bank's economic outlook.
All three major U.S. stock indexes ended the week lower, with weaker-than-expected regional manufacturing data on Monday giving the week a negative tone from the start. The Dow Jones industrial average fell 3 percent, while the Standard & Poor's 500 index lost 2.7 percent and the Nasdaq dropped 1.7 percent.
The benchmark S&P 500 has gained 36 percent since hitting a 12-year closing low in early March, but investors have been eager for signs that early hopes of an economic recovery are not false.
"I do think now that we're up here, and we're priced for some good news, it's going to be important we have some follow-through," said Frank Lesh, futures analyst and broker at FuturePath Trading LLC in Chicago.
Some other data this week that could shed some light on the economic outlook will include durable goods orders, personal income and spending data, and weekly jobless claims.
Fed and Earnings Watch
While expectations are that the Fed will keep rates steady in the coming week, the question is: How long will the Fed keep rates near historic low levels? The Fed's last decision on rates was in December, when it cut the benchmark fed funds rate to almost zero from 1 percent.
"They will probably have to send a clear, credible signal that rates are not going to be raised in 2009 or even in the first half of 2010," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.
This week, Federal Reserve Chairman Ben Bernanke is scheduled to testify on Thursday at a congressional committee hearing on the Bank of America-Merrill Lynch merger. Last week, Representative Edolphus "Ed" Towns, a Democrat from New York, issued a second subpoena to the Fed seeking more documents, dating from last September through January, on the closed-door merger talks.
With the second quarter ending June 30, investors may see some preannouncements from companies that could provide a better picture of how the corporate reporting period will look. Outlooks for the third quarter also will be key.
U.S. corporate earnings, a major influence for the stock market, have been slow to recover since the recession. Data compiled by Thomson Reuters shows a decline in second-quarter earnings of 34.4 percent from a year ago.
"What's going to drive the market is the third-quarter outlook when companies report second-quarter earnings," said Jim Awad, managing director at Zephyr Management in New York.
Michael Hartnett, a strategist who spoke at Reuters Investment Outlook Summit in New York last week, said companies' top-line growth is going to be crucial for the coming earnings season and the stock market.
If there is little evidence of top-line growth, the market will take that as a sign there is not much of an economic recovery, said Hartnett, chief global equity strategist for Banc of America Merrill Lynch.
The earnings period typically kicks off with results from aluminum producer Alcoa Inc, which is scheduled to report on July 7.
Housing, Durables and Debt
The U.S. Treasury's $104 billion worth of bond auctions next week could also keep stock investors on edge. Worries about supply have weighed on the U.S. government bond market, with $2 trillion worth of new debt expected to be issued this year.
Stock investors have been worried about the rise in bond yields, which could signal higher borrowing costs for businesses and consumers. Yields rise as bond prices fall.
Existing home sales are expected on Tuesday and new home sales are due the following day.
Economists polled by Reuters forecast that existing home sales increased to an annual rate of 4.81 million units in May from April's pace of 4.68 million units. They predict that new home sales rose to an annual rate of 360,000 units in May from April's pace of 352,000 units.
"If the housing numbers are good, the (stock) market will rally. There is definitely this view that housing led us down, and it might lead us back out," said Janna Sampson, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.
Other economic data next week includes a report on May durable goods orders on Wednesday and the final reading on U.S. first-quarter domestic product on Thursday, along with weekly jobless claims. On Friday, May personal income and spending data will be released, followed by the final reading for June from the Reuters/University of Michigan consumer sentiment index.
