Wall Street is becoming increasingly concerned about the health of the U.S. economy. American households also feel the pressure, and if this week's economic and financial reports prove this, they could undermine the stock market's recovery from its worst day in two years.

After the upheaval in the global financial markets due to the yen-driven closure of carry trades and concerns about the weakness of the US economy last week, the US stock market ended a tumultuous week on Friday with all major stock indices unable to fully reverse the week's downturn.

According to FactSet data, the S&P 500 index fell by less than 0.1% last week, the Nasdaq Composite index fell by 0.2%, and the Dow Jones Industrial Average index fell by 0.6% during the same period.

A series of new US economic indicators, including the July consumer price index (CPI) report, the latest retail sales figures, and the earnings of some of America's top retailers, will be released later this week. The market's focus has now shifted to these indicators, as investors try to determine whether American households are facing increased pressure from rising inflation and interest rates.

After concerns about the risk of a hard landing caused a brief "Wile E. Coyote" moment for financial markets, led by Michael Gapen's team of economists at Bank of America Global Research, stability returned to financial markets. From here on out, the data will tell us what kind of economy we have: is it slowing down or rapidly decelerating?

Like all important economic data releases, the July CPI data could have serious implications for the market and the Fed, but investors will be paying more attention this time around because they are concerned that any signs of economic slowdown and inadequate softening of inflation could lead to a slump in the stock market.

Economists surveyed by The Wall Street Journal expect overall inflation in July to remain steady at 3% year-on-year, while core CPI is forecast to slow from 3.3% in June to 3.2%.

Brian Weinstein, the head of global markets at Morgan Stanley Investment Management, believes that inflation will remain above the Fed's target for some time, as historically, when CPI stabilizes below 2%, it is "extremely rare."

"In some pain points, such as car insurance and home insurance, there seems to be inflation, especially in places where the population is booming, which takes money out of consumers' pockets every month," said Weinstein.

He also noted that the uncertainty surrounding geopolitical conflicts and the economic plans of the 2024 US presidential candidates was "enough to keep the inflation rate from meaningfully returning below 2%."

Consumers' wallets are getting thinner, and businesses are feeling the pinch as well. In the first half of this year, the Fed's plans to contain price pressures while maintaining economic prosperity progressed smoothly. However, over the past few months, as companies targeting consumers begin to highlight early signs of a slowdown in consumer spending, the plan has begun to shift.

Last month, luxury goods group LVMH reported a decline in second-quarter sales in Asia (excluding Japan), which accounts for 30% of its revenue in the first half of 2024. McDonald's (MCD.N) last week's earnings report showed that inflationary pressures were making its consumers, especially low-income families, more selective about how to spend their money, while vacation rental platform Airbnb (ABNB.O) expects leisure travel to slow down as consumers postpone overnight accommodation bookings due to unclear economic prospects.

Years of sustained inflation and the Fed's tightening cycle have squeezed the savings that American households have accumulated during the pandemic. Many consumers have had to become more discerning about what they buy and where they consume.

"Most consumer-facing companies such as Starbucks (SBUX.O) and McDonald's have issued profit warnings, which surprises me, and this is undoubtedly a very difficult consumer environment," said Brad Conger, chief investment officer at Hirtle Callaghan & Co. "This shows that consumers' long-suppressed savings and their confidence in their work and future income are exhausted."

This makes the upcoming financial reports of America's largest retailers another big event in the US stock market this week.

Companies such as Walmart (WMT.N) and Home Depot (HD.N) will release their financial reports on Tuesday and Thursday, respectively, as investors wait for evidence of consumer conditions from companies that sell everyday household necessities.

According to Kung, the weakness in consumer spending may spread to other areas of the consumer industry. He said, "People are cutting back on various expenses, so this means that companies will cut back on spending when they plan to hire, which will in turn feed into employment and income."

It is certain that growth signals shown in economic data so far this year have been mixed. Earlier last week, the service industry economy rebounded in July, which contradicts the growing view that the United States may be entering a recession. The number of Americans applying for unemployment benefits last week dropped to 0.233 million people, falling from the annual high point, indicating that even though the employment report in July was weak, the labor market may still be in good shape.

These two reports from last week helped the stock market recover some of its weekly decline from Monday.

"The stock market is somewhat panicked and fragile... but a slight upward trend in economic data will not have a big impact on market sentiment, that is to say, if there are more bullish data in the coming weeks, the impact of each data on the market will gradually weaken," Kung told MarketWatch. "Currently, the market is very fragile, so it is overreacting."

Winston said that there will likely be more volatility in the market in the future, which could set a limit on the stock market's upward trend. "But I don't think this means we will have a hard landing. I don't think it guarantees an economic recession," he added.