Hedge funds are aggressively unwinding positions in consumer discretionary stocks, signalling rising concerns about a potential economic slowdown in 2025, according to a recent Goldman Sachs prime brokerage note seen by Reuters.

The data shows that hedge funds were net sellers of consumer discretionary equities last week, making it the most heavily sold sector year-to-date. The sector includes companies offering non-essential goods and services such as retail, travel, and luxury items – all of which tend to suffer when consumer sentiment weakens.

"This sharp rotation out of discretionary names is a clear indicator that hedge funds are preparing for economic turbulence — possibly a recession," said Bruno Schneller, Managing Director at Erlen Capital Management.

The selloff comes amid tariff uncertainty and broader macro headwinds, which have stoked fears of an economic downturn. While Morgan Stanley analysts have stopped short of calling a full-blown recession, they recently noted that the line between sluggish growth and contraction is narrowing. Adding to the caution, the US Conference Board’s Consumer Confidence Index dropped to a four-year low in March, reflecting increased anxiety around the economic outlook and potentially curbing consumer spending – a key driver of GDP growth.

According to Schneller, hedge funds are closely watching signals beyond equity markets, including bond market volatility and credit spreads, which have widened significantly. “We’re seeing the worst junk bond spreads since 2008,” he noted, “which compounds the fear of a consumer-driven slowdown.”

Goldman’s note also highlighted that hedge fund selling was concentrated in North America and Europe, with the hardest-hit segments including retail, autos, hotels, restaurants, and textiles. In contrast, discretionary capital is increasingly flowing toward more defensive sectors such as consumer staples, healthcare, and utilities.

The shift in positioning reflects a broader risk-off sentiment among hedge funds, as they navigate a complex environment shaped by trade tensions, weakening consumer metrics, and tightening financial conditions.