The bear market rally is over because investors are expecting more shocks from inflation and rates, Bank of America says

• The bear-market rally for stocks has disappeared as investor concerns about inflation and interest rates linger, Bank of America said Friday.
• "We're in technical recession but just don't realize it," said the bank's chief investment strategist Michael Hartnett.

The S&P 500 slumped to near its lowest point of 2022 on Friday with stocks struggling to hold onto recent signs of improvement because investors are still on edge about inflation and the ramp-up in interest rates, according to Bank of America.

The broad-based index, alongside the Nasdaq Composite and the Dow Jones Industrial Average, was tanking Friday after the Bureau of Labor Statistics said the Consumer Price Index rose 8.6% in the year through May, a fresh 41-year high. Economists surveyed by Bloomberg expected a reading of 8.3%.

The S&P 500 in late May snapped seven consecutive weeks of losses and stepped out of a bear market, partially on speculation that consumer inflation may have peaked in April, raising hopes the Federal Reserve would have some leeway to pause interest rate hikes as it works to tame inflation.

"In short, inflation shock not over, rates shock just starting, growth shock coming, no release valve from peak in yields, bear market rally too consensus," Michael Hartnett, Bank of America's chief investment strategist, wrote in the bank's Flow Show note Friday.

Stocks have tumbled this year with investors fearing a fast pace of rate hikes by the Federal Reserve will push the world's largest economy into a recession. The economy shrank by 1.5% in the first quarter of 2022.

The Federal Reserve has raised the fed funds rate by 75 basis points since March and is expected to raise the benchmark by another 50 basis points to a range of 1.25% to 1.50% after its June 14-15 meeting.

"We're in technical recession but just don't realize it," said Hartnett, noting the Atlanta Fed GDPNow forecast for second-quarter economic growth is just 0.9%. The economy is "a couple of bad data points away from 'recession'," with data on housing, retail inventories, and consumer credit looking gloomier, he said.

Investors have also been watching an acceleration in gasoline prices. The average gallon in the US has climbed to a record high of $5, according to GasBuddy. And JPMorgan analysts have forecast a gallon of gas rising above $6 on average later this summer.