Investors also will be waiting for the outcome of the Federal Reserve's interest rate-setting meeting on Thursday. The direction of bond yields, which have been on the rise recently as official interest rates increase around the world, will be a key factor as well.
"We're going to be a little higher if the Fed statement doesn't change much and the reports show inflationary concerns are under control," said Donald Selkin, director of equity research Joseph Stevens. "[The bond market] has been expecting the worst, and if the Fed stays with the same statement, maybe that will ease bond yields a bit."
The economic data due next week will cover the spectrum of economic activity. Highlights include personal income and spending, home sales and manufacturing activity.
A few companies, including software maker Oracle Corp. , Palm Inc. and BlackBerry maker Research In Motion Ltd. will report results, which could affect investor sentiment in some areas.
"The huge raft of economic data is going to be supportive to higher prices," according to Mike Holland, fund manager at Holland Balanced Fund.
The benchmark lending rate of 5.25% isn't expected to change after the Fed's two-day policy meeting. The question facing investors is where the Fed is in its thinking about rates for the future.
"I imagine that [policy-makers] are probably going to stay on neutral ground," said Charles Rotblut, senior market analyst at Zacks.com. He added that a neutral statement would "put some people's minds at ease about a rise in rates in the near term," which would provide support for stocks.
The market has priced in higher odds of a rate hike by the end of the year, largely on fears that rising energy prices will begin to push up core inflation on the consumer and wholesale levels. Core inflation excludes volatile food and energy prices.
Still, Rotblut said that the market remains vulnerable to "tweaks" in the statement that indicate a drag on the economy from the weak housing sector has grown, or that inflationary pressures are rising around the world.
"As much as we'd like to operate in vacuum, the reality is that we don't," he commented.
Taiwan's central bank this week became the latest to raise interest rates, citing inflationary pressures as a key reason. Rates also have been raised in recent weeks by the European Central Bank, the Swiss central bank and the Reserve Bank of New Zealand.
Housing, spending numbers
Reports on sales of existing and new homes in May will arrive this week. Selkin said that while the reports will be closely monitored, they will likely back up the overall trend of weakness in the sector.
Economists surveyed by MarketWatch expect existing sales in May to fall to 5.9 million from 5.99 million. The report will be issued Monday by the National Association of Realtors.
The Commerce Department is expected on Tuesday to report a fall in new-home sales to 918,000 from 981,0000.
Zacks' Rotblut said that investors also will keep a close watch on personal income and spending figures due Friday, "for something that signals that inflation is rising," even though the Fed will already have released its latest view on inflationary pressures.
Personal income is expected to rise by 0.6%, reversing a decline of 0.1% in April. Consumer spending is forecast to rise 0.7% from 0.5%.
"Depending on how the bond market reacts [those reports] could definitely impact how the equity markets" will trade, according to Rotblut.
Fund manager Holland said that yields would have to surge to hurt corporate borrowing. "You'd have to go hundreds of basis points higer," he added.
A yield of 5.2% on the benchmark 10-year Treasury note, for example, "isn't anywhere near prohibitive" for many companies seeking to borrowing money, Holland commented.
Stocks sank Friday amid concerns about rising interest rates worldwide, and as Bear Stearns Cos. worked to sort out financial trouble at hedge funds linked to subprime mortgages.
The Dow Jones Industrial Average dropped 185 points to 13,360. The S&P 500 Index lost 19 points at 1,502 and the Nasdaq Composite Index fell 28 points to 2,589.
For the week, the Dow lost 2%; the S&P fell 1.9%; and the Nasdaq fell 1.4%.
Treasury prices rallied Friday, pushing yields lower, driven by safe-haven demand stemming from worries about the weak subprime home-lending sector. The yield on the 10-year note finished at 5.15% from 5.161% on Thursday.
Worries over an ongoing strike in Nigeria sent crude-oil futures up 49 cents to close at $69.14 a barrel. Crude prices rose nearly 1% for the week.
The dollar rose against the yen Friday, extending the Japanese currency's stay at its lowest level in four and a half years. But the euro gained against the greenback and some analysts credited the euro's move to the fall in U.S. stocks.
By Carla Mozee