While Wall Street strategists are bullishly raising their targets for the S&P 500 Index, hedge funds are exercising increased caution towards equities, according to a report by Bloomberg citing a note by Goldman Sachs’s prime brokerage desk.
This divergence stems from concerns over the US Federal Reserve’s hesitation to cut interest rates, softer economic data and narrow market breadth.
According to Goldman Sachs, hedge funds have significantly reduced their long-short gross leverage, marking the largest decrease since March 2022. This reduction in exposure reflects a more cautious stance from what is often considered the “smart money”.
Last week, hedge funds were net sellers of US equities, primarily offloading macro products such as index funds and ETFs. However, they turned net buyers of individual stocks for the first time in six weeks.
Goldman Sachs wrote: “We think US growth is priced optimistically and believe there is some cause for pause on the US consumer. Nuance is needed and we are most worried about trade-down risk and the state of the low-end consumer.”
The S&P 500 has surged to an all-time high above 5,400, climbing 14% in H1 2024, and Wall Street strategists have since revised their year-end targets upward. Evercore ISI’s Julian Emanuel recently set his target at 6,000, the highest among major equity strategists tracked by Bloomberg. Four months ago, Goldman Sachs’ David Kostin also raised his target to 5,600 from 5,200.
Hedge funds remain skeptical about sustained gains, however, in large part due to pervasive geopolitical risks. Market breadth also remains narrow, illustrated by the performance gap between the cap-weighted S&P 500 and its equal-weighted counterpart. The former saw a robust 14% gain this year, while the latter has only risen 3.4%. Meanwhile, the Bloomberg Magnificent 7 Total Return Index has surged 35%, highlighting the disparity.
