Stocks ended lower following a volatile week of trading that was punctuated by a mixed batch of quarterly earnings reports and strong economic data, which fizzled many investors hopes the Fed will lower interest rates.
In Friday's trading session, the Dow and S&P 500 each clawed their way to just below the unchanged mark after opening lower, while the Nasdaq managed to eke out a small gain.
A rally in the middle of the week ended as quickly as it began, with declines sparked by a sharp rise in bond yields. Wall Street braced for a glut of economic and earnings news scheduled for next week.
The Federal Open Market Committee will hold a two-day meeting on Jan. 30 to discuss monetary policy, the first of eight Fed meetings this year. Meanwhile, the Department of Commerce will announce the first look at fourth quarter GDP figures on Jan. 31. Closely watched unemployment data is set for release Feb. 2.
"I think there will be some weak figures ahead of us. It wouldn't surprise me at all to see the market sell off next week," Mark Chandler, fixed income strategist at RBC Capital Markets, told CNBC.com. "It is going to be quite a crucial week."
The potential for the Fed to cut rates appears less likely, traders said, as new data indicated a stronger economy than previously thought.
"We've got concern about earnings guidance and renewed concerns about the direction of interest rates," Ted Weisberg, President of Seaport Securities, told CNBC.com. "I think we're overbought, so the market is sensitive to any negative economic or earnings news."
The hope among traders that the Fed will ease interest rates has steadily eroded in the last four to six weeks as new economic data trickles in.
CNBC's Rick Santelli noted that a spike in Treasury yields has spooked a lot of stock traders this week. "When bonds are the main story and interest rates are volatile it bugs equity traders," he said. "I think once bond yields get back in a range, then stock traders will move in."
New York light crude futures closed higher on Friday and rose more than 6% for the week.
Two strong economic reports renewed investors concerns about rates Friday morning. The Commerce Department reported that new orders for durable goods rose 3.1% last month to a seasonally adjusted total of $221.9 billion, led by a surge in orders for commercial aircraft.
"This is a healthy number and this is exactly what you want to see," Jack Bouroudjian, a trader with Brewer Investment Group, told CNBC. There are a lot of things, including this number, that are happening in this market that should tell you, down the road, you are going to see a nice move in equities."
New home sales rose more than expected, up 4.8%. Economists were predicting a 1.2% rise. December existing home sales, out Thursday, fell more than expected. Yields on the 10-year hit fresh five month highs.
Shares of Dow component, Microsoft , rose after the company reported a fiscal second-quarter sales increase of 6% to $12.54 billion, better than forecast. Microsoft cited strong demand for its Xbox 360 video game player. The stock of the world's largest software maker rose even though the company's profit dropped 28% on the delay in shipping the Vista operating system and Office 2007.
Dow components Caterpillar and Honeywell both closed higher after reporting positive fourth-quarter earnings reports.
Halliburton shares dropped after the oil services company said its fourth-quarter profit fell 40%. The results still beat analysts expectations. Halliburton reported earnings of 64 cents a share, higher than the 61 cents the Street was expecting.
Mortgage lenders got a late lift on a Financial Times report that financial giant Bank of America may be considering a buyout with Countrywide Financial . Spokesmen for both companies declined comment to CNBC. Shares of industry peer New Century Financial also rose. CNBC's Dylan Ratigan reports that Countrywide has been entertaining several possible bidders interested in a buyout of Countrywide or alliance for several months.