The market rally is currently facing a critical juncture as the S&P 500 ended the week below 5,000 points for the first time since late February. The Nasdaq Composite also experienced a significant drop of over 5% during the week, while the Dow remained relatively steady. Now, all eyes are on crucial economic growth and inflation readings, as well as the upcoming earnings reports from Big Tech companies, to determine the market's next move.

This week holds key economic data releases that will provide insights into the state of the economy. On Thursday, investors will receive the advanced reading of the first-quarter economic growth, which economists expect to show an annualized rate of 2.5%. While this figure is lower than the impressive 3.4% growth seen in the fourth quarter of 2023, it still indicates ongoing economic resilience. Additionally, on Friday, the March reading of the Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred inflation gauge, will be unveiled. Economists anticipate that the "core" PCE inflation for March will be at 2.7% from the previous year, slightly lower than February's 2.8% gain.

Investors are closely watching the PCE reading as it could significantly impact Federal Reserve interest rate decisions. If core PCE inflation remains around 0.25% month-over-month for March and April, the year-on-year reading will decrease from 2.8% to 2.6%, potentially providing the Fed with the flexibility to begin gradually lowering policy rates starting in June or July.

Big Tech earnings are also poised to make an impact this week, with prominent companies such as Meta, Microsoft, Alphabet, Tesla, and Chipotle set to report their quarterly results. These companies, along with Nvidia and Amazon, are expected to have experienced earnings growth of 64.3% in the first quarter, according to FactSet. However, recent market reactions to earnings reports suggest that even positive results may not have the desired effect on stocks, especially considering the extended valuations of some companies. Stock reactions following the release of quarterly results have been muted, with stocks beating Wall Street's estimates rising by only 0.8% in the next trading session.

The market's current sensitivity to earnings reports is compounded by rising bond yields, which have become a concern for investors once again. The 2-year Treasury yield reached 5% on Tuesday for the first time since the stock market bottomed in October 2023. This rise comes as Federal Reserve Chair Jerome Powell acknowledged that inflation is taking longer than expected to reach the desired 2% target. Rising bond yields have historically been a pain point for stocks, and analysts warn that it could become a key concern for the market, just as it was during the sell-off last fall.

Given these potential challenges, some experts recommend adopting a defensive stance in the market. Julian Emanuel, who leads Evercore ISI's equity and derivatives strategy, advises investors to consider sectors such as Health Care and Consumer Staples. Additionally, he highlights that holding cash in a money market account could still yield around 5% and remains a viable option for portfolios.

As the week unfolds, investors will closely monitor economic data releases and Big Tech earnings for any signs of potential market movement. The outcome of these factors will play a crucial role in determining the direction of the market rally and the future of the economy.