Under the shadow of the trade war, cautious sentiment is rising, and hedge funds have sold U.S. stocks for four consecutive weeks

Despite the S&P 500 index hovering near historical highs, the sharpest funds on Wall Street are still maintaining a bearish stance.

According to the latest report from Goldman Sachs' main brokerage, hedge funds are continuing the cautious strategy they adopted during the tariff turmoil in April, selling U.S. stocks for four consecutive weeks, with the pace of reduction in technology, media, and telecommunications stocks reaching the fastest in a year. The speed at which funds are selling stocks has outpaced short covering, a trend that is particularly evident ahead of the earnings season for the technology sector.

In stark contrast to the cautious attitude of hedge funds, retail investors have net bought stocks for 23 consecutive trading days. The most seasoned market participants are choosing to exit the stock market as it reaches new highs, which may signal that U.S. stocks will face severe seasonal adjustment pressures against the backdrop of ongoing trade war concerns.

The Federal Reserve kept interest rates unchanged this week, with Chairman Powell reiterating that officials need more time to assess tariffs and their impact on inflation before easing policy.

Goldman Sachs' trading department believes that retail demand is unlikely to disappear unless there are significant changes in the economic outlook or employment data. However, against the backdrop of ongoing tariff concerns and high valuations, the cautious stance of hedge funds may be validated in the upcoming seasonal adjustments.

Cautious Strategy Avoids Market Volatility

In late March, in anticipation of Trump announcing tariff measures, hedge funds reduced their stock exposure and increased short positions. This strategy ultimately proved wise, especially for those funds that simultaneously increased global stock allocations, as global markets outperformed U.S. stocks.

Jonathan Caplis, CEO of hedge fund research firm PivotalPath, stated, “Managers remain quite cautious as many potential risks have not disappeared.” He pointed out that macroeconomic uncertainty is a major concern.

Caplis further explained, “Hedge funds did not experience the same drawdown as the market because they reduced leverage in advance. They did not endure that kind of pain, so they are not forced to participate in the rebound.”

Missed the Rebound, but Strategy May Pay Off

Indeed, hedge funds have missed this round of gains. The S&P 500 index has risen about 25% since its April low and is on track for the longest monthly winning streak since September.

According to the PivotalPath stock diversification index, hedge funds have performed mediocrely this year. As of the end of June, their return rate was 7.8%, ranking in the 72nd percentile among all six-month periods since January 2000.

Seasonal Factors Intensify Market Risks

However, if the seasonal patterns of the stock market hold, their strategy may yield returns at least in the short term. August and September are typically the two worst-performing months of the year. Coupled with high valuations and the pressure of tariff deadlines, this could pose trouble for the S&P 500 index.

UBS data shows that considering presidential term factors since 1950, the seasonal performance of these two months looks even worse The bank's head of macro equity strategy, Aaron Nordvik, wrote in the report: "The performance in these two months is particularly poor in the first year of a president's four-year term (the inauguration year). If this pattern holds true, a strong increase is expected by the end of the year, but before that, there will be a tough two months starting around August 4."