NEW YORK (CNN/Money) - U.S. stocks fell sharply Thursday, as disappointment about Yahoo!'s earnings and new signs of weakness in the labor market led to profit taking after the most recent stage of the rally. Friday could see similar challenges, analysts said, after GE reports its earnings.

"I think what you're seeing is a natural pullback given how far the market has come, particularly in the last week," said Saret Sethi, a portfolio manager at Douglas C. Lane & Associates. "We're also getting into earnings season, so people are taking some money off the table. A lot of people have seen their stocks rise in the last few months and figure, why not take some profits?"

Stocks started the week off with a bang, rallying sharply Monday and more modestly Tuesday, but Wednesday and Thursday were about consolidation, and Friday could bring more of the same. As of Thursday's close, the Nasdaq and the S&P 500 are still fractionally higher for the week, but the Dow is a little lower.

"It's not the end of the run," said Ram Kolluri, chief investment officer at GlobalValue Investors. "The market needs a breather, and that's what the selling is about."

Kolluri said that although stocks will likely remain vulnerable to the same profit taking Friday, longer-term, the uptrend is still intact.

Late Wednesday, Internet bellwether Yahoo! (YHOO: down $2.73 to $32.56, Research, Estimates) said it earned 8 cents per share in its second quarter, in line with First Call estimates and up from 3 cents a year earlier. The company also raised its earnings outlook for the full year. But with the stock up more than 100 percent this year already, as of Wednesday's close, investors were disappointed with the results and cashed out, pushing the stock 7.7 percent lower.

With expectations for a corporate profit recovery running so high, it may not be enough for companies to simply meet forecasts, analysts said. At least in the case of Yahoo!, many market watchers had been betting the company would beat expectations.

After the close of trade, Juniper Networks (JNPR: down $0.76 to $14.11, Research, Estimates) reported second-quarter earnings of 3 cents per share, a penny better than analysts expected and up from breakeven results a year earlier. But on a conference call, the company indicated that the third quarter could be soft, sending the stock lower in after-hours trade.

But the biggest earnings news of the week comes tomorrow morning before the bell from Dow stock General Electric (GE: down $0.19 to $28.19, Research, Estimates). The conglomerate is forecast to have earned 38 cents per share, down from 44 cents a year earlier.

"I think GE's pretty much forecasted that this is not going to be a blowout year, and I would be surprised if what the company reports moves stocks too much," Sethi added. "What's going to determine how stocks perform over these next three weeks, the heaviest period of earnings reporting, is what these companies say about the rest of the year and the demand for their products.

Although not big market movers, Friday also brings a report on producer prices, forecast to have risen 0.3 percent in June after falling 0.3 percent in May. The core PPI, which excludes volatile food and energy prices, is expected to show a rise of 0.1 percent, after rising 0.1 percent in the previous month. The May trade balance is also due.

The Nasdaq composite (down 31.60 to 1715.86, Charts) fell 1.8 percent, while the Dow Jones industrial average (down 120.17 to 9036.04, Charts) and the Standard & Poor's 500 (down 13.51 to 988.70, Charts) index both lost around 1.3 percent. Although the selloff was steep, the major indexes all managed to close off their worst levels of the session.

In terms of overall sector performance, it was the areas that have benefited most since the start of the rally that saw the most selling Thursday, including biotechs, financials, semiconductors and other technology issues. Case in point: Hewlett-Packard (HPQ: down $0.88 to $22.05, Research, Estimates), the Dow's biggest loser on the day, fell 3.8 percent without any new news about the company. The stock hit a new 52-week high in the last week.

Yahoo!'s impact was felt by other Web stocks, such as eBay (EBAY: down $2.76 to $112.08, Research, Estimates), Amazon.com (AMZN: down $2.25 to $38.25, Research, Estimates) and Overture Services (OVER: down $1.48 to $21.32, Research, Estimates). The Goldman Sachs Internet (down 5.84 to 130.22, Charts) index, which includes those three stocks and Yahoo!, fell 4.2 percent.

Of the 30 issues that comprise the Dow industrials, 29 traded lower. The only one trading barely in the black was Coca-Cola (KO: up $0.13 to $44.01, Research, Estimates), in response to solid earnings from rival PepsiCo (PEP: up $2.40 to $46.95, Research, Estimates), announced this morning. PepsiCo stock was up 5.4 percent, a rare gainer on the day.

The stock of troubled energy provider Mirant (MIR: down $0.42 to $2.28, Research, Estimates) fell 15.5 percent and was the second most-actively traded on the NYSE after Merrill Lynch downgraded it to "sell" from "neutral," saying that it is increasingly likely the company will file for bankruptcy protection. Mirant has been trying to avoid this by restructuring $4.9 billion in debt, but it seems unlikely that it will complete this in time for its deadline next Monday, the Merrill analyst said.

The Nasdaq's three most heavily weighted stocks -- Microsoft (MSFT: down $0.56 to $26.91, Research, Estimates), Intel (INTC: down $0.57 to $22.91, Research, Estimates) and Cisco Systems (CSCO: down $0.49 to $18.31, Research, Estimates) -- all lost more than 2 percent. Intel and Microsoft are also Dow 30 stocks and added to the industrials' decline.

Also adding to the market's downward pull: the number of Americans filing claims for unemployment rose to 439,000 from 430,000 in the previous week. Economists were expecting a decline to 420,000. A reading above 400,000 is seen as a mark of deterioration in the labor market, and the weekly jobless claims tally has not dropped below the 400,000 mark since mid-February.

Market breadth was decidedly negative, with 11 stocks falling for every five that rose on the New York Stock Exchange and two stocks falling for every one that rose on the Nasdaq. Some 1.43 billion shares changed hands on the NYSE and about 1.71 billion shares traded on the Nasdaq.

Treasury prices edged higher, with the 10-year note yield down to 3.67 percent as it added 3/32 of a point in price. The dollar was a little weaker against the euro and yen.

NYMEX light sweet crude oil futures rose 18 cents to $31.06 a barrel. COMEX gold added 70 cents to $344.60 an ounce.