Hedge Funds Turn Bullish on Consumer Stocks Ahead of Potential Rate Cuts, Goldman Says

Natalia Kniazhevich, Bloomberg News

, Source: Goldman Sachs FICC, Equities, and Prime Services data

(Bloomberg) -- Hedge funds are reversing their bearish stance on consumer stocks as the latest economic data and comments from the Federal Reserve revive bets on interest rate cuts.

After four weeks of selling, hedge funds last week piled into consumer discretionary stocks, which saw the largest net buying during the week ended May 3, according to data compiled by Goldman Sachs Group Inc.’s prime brokerage desk. The move was driven by long buys as well as the largest short covering since December 2023.

Broadline retail, autos, hotels, restaurants and leisure were the most net bought sub-sectors, Goldman said. However, consumer discretionary still remains the most net sold US sector on Goldman’s prime book year-to-date.

The shift in sentiment comes amid broader optimism in US markets, after Fed Chair Jerome Powell last week signaled he doesn’t see additional interest-rate hikes and the latest jobs report showed the US labor market is softening. Swap traders revived bets that the US central bank will begin lowering rates by the end of the year.

“Friday’s rip higher by rate sensitive mega cap stocks suggests rate hikes are off the table. For now,” said Mark Connors, head of research at 3iQ. “Lower rate expectations spurred short covering and new longs to consumer sensitive discretionary names.” But to Connors, that’s more a reaction rather than an indication of an enduring trend.

Consumer stocks buying from hedge funds also comes as some of the biggest food US food and restaurant companies missed earnings estimates, sending warning signals on consumer spending. Starbucks Corp. last week said sales fell for the first time since 2020 as transactions declined in every region. Meanwhile, McDonald’s Corp. and Darden Restaurants Inc. highlighted declines in visits from low-end consumers.

US economic data indicated some weakness in consumer confidence in April, marking the lowest level since mid-2022 as Americans’ views of the labor market and their outlook for the economy deteriorated. The Conference Board’s gauge of sentiment dropped for a third straight month, with elevated prices for food and gas among the top concerns.

“Depleting savings was supposed to be fixed by real income growth, but inflation is proving to be sticky,” Goldman’s team led by Louis Miller and Faris Mourad wrote in a note to clients. “Our team is getting bearish on consumer and soft landing baskets.”

To Apollo Global Management Inc. chief economist Torsten Slok, the recovery continues to resemble the shape of the letter K. “Consumers with high-income households are benefiting from higher asset prices and solid cash flows from fixed income, and lower-income consumers are being more negatively impacted by higher interest rates weighing on households with higher debt levels,” Slok said in an email.

Overall, hedge funds net bought US equities for a third straight week, but at a slower pace. Other sectors that saw net buying were health care, industrials and information technology. On the flip side, communication services was the most net sold US sector, followed by staples, financials and utilities.