Hedge Funds Are Selling Out of U.s. Cyclical Stocks at a Faster Rate

Hedge funds executed their most significant stock sell-off since January last week, aggressively divesting from every U.S. cyclical sector and undertaking their largest sell-off of U.S. industrials in over a decade, according to Goldman Sachs research.

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From May 17 to 23, money managers orchestrated a substantial retreat from U.S. stocks closely tied to the American economy's health. This exodus was prompted by signals from the Federal Reserve indicating a firm stance on reducing inflation. Minutes from the May 1 meeting revealed that some Federal Reserve officials discussed the possibility of maintaining interest rates at current levels for an extended period or even raising them again if inflation did not show sustainable movement toward the 2% target.

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In response, hedge funds sold off stocks across all American cyclical sectors, including industrials, financials, materials, and real estate, at the fastest rate since December 2023, based on data from Goldman Sachs’ Prime Brokerage. This move saw the fastest two-week sell-off of U.S. industrial stocks in more than a decade, with hedge funds divesting from passenger airlines, machinery, ground transportation, and professional services companies.

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The sell-off in airline stocks occurred just before American Airlines released its outlook on Tuesday, which led to a decline in the Fort Worth, Texas-based company's shares during Wednesday’s pre-market trading session.

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Additionally, hedge funds began reducing their positions in emerging market Asian stocks, initiating their first net sale of Chinese stocks in five weeks.

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Contrasting this broad sell-off, hedge funds increased their exposure to the "Magnificent Seven" mega-cap stocks to record levels, driven by Nvidia's impressive first-quarter results, which reported substantial increases in revenue and profits.

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This shift saw hedge funds' holdings in the Magnificent Seven stocks—Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA)—rise to 20% of their entire portfolios. This is a significant increase from 9.3% at the start of 2023 and 17.3% at the beginning of 2024.

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In summary, the hedge funds’ substantial exit from U.S. cyclical sectors and industrials highlights their response to the Federal Reserve's potential for prolonged high-interest rates to combat inflation. The rapid divestment from sectors deeply intertwined with the economy, such as industrials and airlines, underscores the cautious stance adopted by money managers amid economic uncertainty. Conversely, the increased allocation to mega-cap tech stocks like Nvidia and other members of the Magnificent Seven reflects a strategic pivot towards assets perceived as having robust growth potential amidst a volatile economic landscape. This dual strategy indicates a broader market sentiment where hedge funds are hedging their bets by pulling out of economically sensitive sectors while doubling down on high-performing tech giants, anticipating sustained performance in these resilient stocks.

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