Stocks staged a modest comeback to kick off the week as investors largely shrugged off the worst trading action of the year on Friday when fears over inflation and economic uncertainty dragged down the major indexes. 

In mid-afternoon trading, the Dow (^DJI) inched up around 0.5%, while the benchmark S&P 500 (^GSPC) secured gains of around 0.2%. The tech-heavy Nasdaq (^IXIC) fell around 0.2%, burdened by shares of Palantir (PLTR), which declined another 8% on reports of government budget cuts.

"Multiple factors fueled the decline on Thursday to Friday," Fundstrat head of research Tom Lee wrote in a note to clients on Monday, referencing Walmart's (WMT) soft guidance as consumer spending fears came into focus, along with the potential economic impact of tariffs and Microsoft's (MSFT) reported decision to cancel some leases for data center capacity. 

"While there are merits to these concerns, we also believe these concerns are likely only 'flesh wounds' to the positive for these equities," Lee said, laying out multiple catalysts in the week ahead.

According to Lee, Nvidia (NVDA) earnings on Wednesday are "likely a positive" to equities, while Friday's PCE data "likely affirms inflation tracking lower." 

The odds of an interest rate cut in May have also doubled in recent weeks, "reflecting some concerns about consumer softness, but also is a reminder the Fed 'put' is in play."

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

"Bottom line: Investors are 'buying the dip' as 2025 is tracking better than expected," Lee said, noting a cash pile of $7 trillion on the sidelines.

Stocks have drifted higher since the start of the year, with the S&P 500 hitting two record highs last week alone. Notably, the index has logged 35 sessions without posting consecutive declines of more than 1%, according to data compiled by Bloomberg, the longest such streak since late December and a phenomenon that's only occurred three times in the past year. 

"Since November, everyone's really piled into the market," Michael O'Rourke, chief market strategist at JonesTrading, told Yahoo Finance in an interview on Monday. "Everyone's been very bullish, very optimistic, [but] we have a long way to go for all these optimistic Trump policies to come into shape."

To that point, it's possible policy uncertainties could create some market volatility in the months ahead as traders attempt to appropriately price in the risk.

"It's one of those things where you do have to break some eggs to make an omelet," O'Rourke said. "And I think we're going to be in the egg-breaking stage for the next six months to a year. ... The market has to really digest those [tariffs and other measures] to see real progress somewhere down the line." 

Reuters / Reuters

Citi US equity strategist Scott Chronert added in a separate interview with Yahoo Finance on Friday that the path forward for markets will likely come with more bumps. Stocks, though, should continue to chug higher. 

"Our view is that there's still upside to the S&P between now and year-end," Chronert said, reiterating a 6,500 base case for the benchmark index, which implies about 8% upside based on current levels. "But between here and there is probably an ongoing period of volatility and concern that keeps us looking for pullbacks and better buying points."

Overall, most of the "Magnificent Seven" tech stocks, including Nvidia, are lagging the S&P 500 so far this year. Those names also aren't contributing nearly as much to the gains seen in benchmark averages over the past two years. 

But a strong earnings season has helped offset some of that Mag Seven underperformance. 

According to the latest earnings update from FactSet, published Feb. 19, both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above their respective 10-year averages. With Q4 2024, the index is also reporting its highest year-over-year earnings growth rate in three years.

Lee described the upcoming Nvidia earnings, on tap for Wednesday, as a "major event" that's likely to serve as an inflection point for the rest of the Mag Seven, which might not lag for much longer. 

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

Click here for the latest economic news and indicators to help inform your investing decisions

Read the latest financial and business news from Yahoo Finance