Hedge Funds Turn Cautious on Stocks Even as Wall Street Strategists Get Bullish

Wall Street strategists are rushing to raise their targets for the S&P 500 Index, but hedge funds are growing increasingly cautious about equities due to the Federal Reserve’s reluctance to cut interest rates, softer economic data and narrow stock market breadth.

Hedge funds decreased their long-short gross leverage, which measures their overall exposure to the market, by the most since March 2022, according to a note from Goldman Sachs Group Inc.’s prime brokerage desk. The move points to a more cautious stance from the so-called smart money, Goldman’s team wrote.

The funds were net sellers of US equities last week, with the selling largely in macro products such as index funds and ETFs. However, hedge funds were net buyers of single stocks for the first time in six weeks, a potential indication that investment managers are becoming more selective.

“We think US growth is priced optimistically and think there is some cause for pause on the US consumer,” the Goldman team wrote. “Nuance is needed and we are most worried about trade-down risk and the state of the low-end consumer.”