The next test for stocks

Recession talk has been circling the stock market during its rapid decline, but those concerns could be allayed over the next two weeks depending on whether U.S. data improve or corporate earnings perk up.

Stocks bounced Thursday in a choppy session, as oil rebounded by more than 4 percent. For Friday, there are a few pieces of economic data — Markit manufacturing PMI at 9:45 a.m. ET and leading indicators and existing home sales, both at 10 a.m. More telling may be earnings reports from global industrial giant General Electric, railroad Kansas City Southern and software giant SAP. Synchrony Financial, Sotheby's, SunTrust, Rockwell Collins, Citizens Financial and Legg Mason also report.

Oil could resume its decline Friday, after West Texas Intermediate futures settled higher at $29.53 per barrel Thursday.

Read MoreFor the US economy, bad news is actually bad news

Trader working on the floor of the New York Stock Exchange
Andrew Burton | Getty Images
Trader working on the floor of the New York Stock Exchange

"I think there will be profit-taking," said John Kilduff, partner at Again Capital. "It was a totally counter-trend rally in a continuing downward move. If anything a snowstorm will impinge on fuel demand. That's another negative for this market." A major winter snowstorm was headed for the East Coast on Friday and Saturday.

But as for stocks, they could languish until there's more evidence of the health of the economy and the state of corporate profits.

"I don't see anything that says to me the economy is really faltering," said James Paulsen, chief investment strategist at Wells Capital Management. "I think this (sell-off) could end if we get data that puts to bed that the economy is anywhere close to going into recession."

Paulsen does expect the selling to continue until the S&P 500 breaks below 1,800. It closed at 1,868 on Thursday, up 9 points. With that gain, the index is now down 8.5 percent for the month of January.

"It's readjusting to the Fed no longer being accommodative," he said. "When it does this, you have to find a catalyst. That's why I'm not so sure it's about the economy. Sure growth has slowed a little bit ... but I think it's about a market that got really highly valued, it's sentiment that got somewhat complacent. The economy started getting better so everyone started feeling better."

Read MoreFinding long-term value in the stock plunge

But the earnings have weakened, and that means stocks were too highly valued, Paulsen added. Of the S&P companies already having reported, 69 percent have beaten earnings estimates but 51 percent have missed on revenues. Based on expectations and actual reports, S&P earnings are projected to decline 4.5 percent and revenues are expected to fall by 3.5 percent, according to Thomson Reuters.

Some of the comments so far have been disappointing and show a softening in segments of the economy. Starbucks for instance, forecast earnings below analysts' estimates for the current quarter, but in its fiscal first quarter, domestic sales were better than expected but China and Asia were below expectations. Union Pacific on Thursday reported a larger-than-expected 22 percent decline in earnings, due in big part to the drop in energy-related shipments.

After the bell, Boeing weighed in with news that it would take a $569 million charge in its fourth quarter due to a cut in production of the 747-8 aircraft amid weakness in the air freight market.

Even if the economy is not heading for a recession, the fear is the very behavior of the financial markets could sap the economy's strength. The high-yield debt market, for instance, has seen spreads widening for weeks, most particularly in energy and commodities names. In the Treasury market, the yield curve has been flattening, with the distance between yields on two-year and 10-year notes getting closer together, and that is seen as a signal of pending economic weakness.

Read More Will the market get Trump'd?

"We need to be cognizant that markets contain a lot of information," said Deutsche Bank's chief U.S. economist, Joseph LaVorgna. "When you get all three markets telling you the same thing — wider credit spreads, falling equity prices and surging dollar due to a flight to safety, that's a powerful message. Overlay that with a manufacturing sector that's in recession and economy that's firing on just one cylinder — and that's the consumer — you have to be concerned. I'd be a lot less worried with this market, if growth were broader."

LaVorgna said if the Fed sounds more dovish after its meeting next week and some of the important upcoming data show improvement that would help markets. "If the Fed relents, energy stops falling and there's any kind of bounce, we could kind of muddle through this year. ... That's a plausible story. That's my baseline. We would need some good news, and right now, we just don't have it," he said. "I'm worried the data won't be compelling enough to break the fever in the markets. I'm hoping it will, but it won't necessarily and then if we continue to have tightening financial conditions, it's only a matter of time before the data weakens."

Some of the key data expected over the next two weeks include consumer sentiment, the employment cost index, durable goods and fourth-quarter GDP next week. LaVorgna expects fourth-quarter growth to be barely positive at just 0.5 percent but it should pick up to 1.5 percent in the first quarter.

In the following week, there is personal income and spending, ISM manufacturing and the important January employment report.

The Fed meets in the coming week and is expected to take no action on rates, but it will be watched for any change in tone about the economy or future rate hikes. The next two weeks are also the heaviest of the corporate earnings reporting season.

Read MoreOil rallies hard, but this is not the bottom

Analytics firm Kensho provided some insight that may indicate that the broader public is not nearly as concerned about a recession as some traders might be. It took measure of Google searches for "bear market" in relation to "bull market." The firm reports the ratio has broken above the level during the 2010 to 2012 sovereign debt crisis but searches for the word "recession" have not increased much at all.

Kensho points out that in the early stages of the 2008 recession, searches jumped for "recession" more than for "bear market." Kensho Trends explains that this may reflect more public concern now about the market's sell-off, but "underlying economic conditions do not seem to be a source of building mass panic."

Read MoreThree incredible facts about the market's horrible run

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.