Beneath the surface of record-high indices, hedge funds are exiting technology stocks at their quickest rate in two years. Last week (ending April 25), both the S&P 500 and Nasdaq posted gains, with the Nasdaq 100 (NDX) rising 2% for the week. However, data from Goldman Sachs' trading desk indicates this rally was far from a broad-based bullish surge. While the S&P 500 hit a new record high on Friday, 324 of its components closed lower that day, resulting in a net breadth reading of -148. This marks the second-worst market breadth on a record-high day in history, only surpassed by October 2025, when 80% of S&P constituents fell on the day of a new high. The underlying divergence within the market is becoming increasingly apparent.
Hedge funds engaged in significant deleveraging, with the selling pressure on tech stocks reaching a near two-year peak. According to Goldman Sachs Prime Services' weekly report, the total leverage of US long/short hedge funds declined by 4.6% last week. This represents the largest nominal deleveraging in the US stock market in seven months (since September 2025), primarily driven by the unwinding of single-stock positions. US equities experienced net selling by hedge funds for the second consecutive week, marking the ninth week of net selling out of the past ten. This selling was almost entirely due to the closure of long positions, with nine out of eleven sectors seeing net outflows.
The most notable activity was in the Information Technology sector, which saw its largest weekly deleveraging since July 2024, ranking as the third largest over the past five years. The ratio of long selling to short covering was 1.9 to 1. Nearly all sub-sectors experienced deleveraging, led in dollar terms by Software (long selling > short covering), Semiconductors & Semiconductor Equipment (long selling), Technology Hardware (short covering > long selling), and Communications Equipment (long selling > short covering).
A concerning point is that despite the significant deleveraging last week, the Information Technology sector's total exposure still accounts for 20.6% of the total US equity market capitalization. This positions it at the 92nd percentile over the past year and the 98th percentile over the past five years. Goldman Sachs notes this suggests "there is a long way to go if tech stocks start to fall."
The Consumer Discretionary sector also faced challenges. Hedge funds were net sellers of this sector for the seventh straight week, with last week's selling pace being the fastest in ten weeks (-2.1 standard deviations relative to the past year's baseline), again almost entirely from long liquidation. Among sub-sectors, Broadline Retail, Hotels Restaurants & Leisure, and Textiles Apparel & Luxury Goods led the declines. In terms of positioning, Consumer Discretionary stocks now constitute 11.5% and 13.2% of hedge funds' total US equity exposure and net exposure, respectively. These levels place them at the 14th and 7th percentiles over the past year, and the 3rd and 29th percentiles over the past five years, indicating they have been reduced to historically low levels.
Goldman's trading desk also highlighted that the Retail sector underperformed the broader market for four consecutive days last week, accumulating a relative performance gap of -350 basis points. The report suggested there was no single clear cause, but rather a sense that concerns are building over oil prices, input costs, and the fading peak effects of fiscal stimulus, with the market's focus shifting to the second half of the year.
A divergence is appearing between asset managers and hedge funds, with ongoing short covering in ETFs. In contrast to the caution exhibited by hedge funds, data from Goldman Sachs' equity sales trading desk shows that Asset Managers have been adding exposure in some tech areas, showing signs of "re-risking." Macro products (combining indices and ETFs) saw slight net buying last week (+0.1 standard deviations relative to the past year's baseline), driven by modest long buying and short covering at a ratio of 2.7 to 1. Short positions in US-listed ETFs decreased again by 1.4%, bringing the total decline for the month to 21.5%. This short covering was concentrated in Credit, Information Technology, and Small-Cap ETFs.
While the AI narrative continues to support the Nasdaq, this week's earnings reports are a critical test. Despite hedge fund selling, the broader market continues to digest positive AI-related developments. Goldman's trading desk noted that a flurry of partnership announcements from Google, coupled with strong earnings reports from Intel (INTC), Texas Instruments (TXN), Lam Research (LRCX), and SK Hynix, have reinvigorated confidence in the semiconductor and AI trade. The Philadelphia Semiconductor Index (SOX) surged 9% last week, with its RSI reaching 85. Intel's better-than-expected results and guidance propelled peers like AMD, ARM, and Qualcomm (QCOM) to single-day gains exceeding 10%. However, this week presents the true test, with Meta, Microsoft (MSFT), Google (GOOGL), and Amazon (AMZN) all scheduled to report earnings after the market closes on Wednesday. The performance in these reports will be crucial in determining whether tech stocks can maintain their current gains, especially in the context of substantial hedge fund selling.
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