Mega-cap tech dominance in the S&P 500 is obscuring investor bets that the US may already be in a recession

• The jump in S&P 500's big tech stocks is masking concerns among investors that the US is already in recession, BlackRock Investment Institute says.
• The index on an equal-weighted basis is down so far in 2023.

Nvidia stock is crushing it this year along with other mega-cap tech shares in the S&P 500, but BlackRock says stripping out those big movers reveals that investors may believe that the US economy is already contracting.

Apple, Nvidia, Alphabet, Amazon, and Microsoft are the S&P 500's five largest stocks by market capitalization, and they've largely held sway over its direction this year. Nvidia's stock has rocketed up 170% on the buzz about AI technology, and the chipmaker on Tuesday was briefly thrust beyond a $1 trillion valuation.

But for the S&P 500, a "deeper look reveals stocks reflect worsening growth," Jean Boivin, head of BlackRock Investment Institute, said in a note published this week.

The S&P 500 has tacked on about 9% this year. But the group said after applying equal weighting to all of the index's constituents regardless of size, it's down by more than 1%.

BlackRock's reference to growth stems from its view that the effect of rate hikes by global central banks to tame inflation is starting to kick in. Recent data from Germany, Europe's largest economy, indicates that the country has entered a recession despite experiencing an energy shock that was less severe than widely anticipated.

"In the U.S., GDP has held up but it has arguably entered recession based on gross domestic income, which assesses the economy's performance on an income rather than spending basis," said Boivin.

Last week, the government said gross domestic income declined 2.3% in the first quarter of 2023 on a seasonally adjusted annual basis. That followed a 3.3% contraction in the fourth quarter of 2002, with the back-to-back quarterly shrinkage indicating a recession. Gross domestic income measures incomes earned and costs incurred in production.

And with inflation still running above the Federal Reserve's 2% target, policymakers may deliver another increase in interest rates.

"Markets are no longer pricing in repeated Fed rate cuts, a sign they're grasping inflation's persistence, in our view," said BlackRock.

The Fed in May issued its 10th consecutive rate hike. Its aggressive series of hikes last year contributed to driving the S&P 500 down more than 18% last year. The benchmark Fed funds rate stood at 5%-5.25%.