Key Takeaways
U.S. equities climbed to fresh records, but hedge funds have been selling for three consecutive weeks, a sharp divergence that has one of Wall Street's most influential trading desks warning of an impending pullback.
"The discussion on the desk continues to be that spot is ignoring the big picture," Goldman Sachs' derivatives specialist Brian Garrett wrote in a weekend note to clients. A 3 percent to 5 percent selloff in the S&P 500 is "a matter of time."
The selling pressure from sophisticated investors comes as the S&P 500 notched three straight weeks of gains to close at all-time highs. Data from Goldman's prime brokerage showed that for the third week in a row, hedge funds sold long positions and initiated new shorts, with the technology sector bearing the brunt of the risk reduction. The move marked the largest deleveraging in U.S. tech stocks in a decade, excluding the meme-stock frenzy of early 2021.
This institutional caution highlights a growing rift in the market, where professional managers are reducing risk while passive and retail investors continue to pour money into equities. The dynamic creates a fragile environment where a sudden shift could trigger outsized volatility, particularly in the crowded technology sector that has led the market's advance.
The scale of the institutional selling has been significant. In addition to hedge funds, Goldman's cash trading desk observed that traditional asset management firms are also becoming a source of net supply for stocks. The selling has been concentrated in the market's biggest winners. The "Magnificent Seven" group of mega-cap tech stocks were net sold on four of the last five trading days, according to the Goldman note.
This trend of selling into strength is not isolated to just one firm's client base. Berkshire Hathaway, under new CEO Greg Abel, extended its streak of net selling to 14 consecutive quarters. The conglomerate reported $8 billion in net stock sales for the first quarter of 2026, building its cash pile to a record $397 billion. The most logical explanation is that managers like Abel are struggling to find attractively valued opportunities in a market they perceive as expensive.
The caution from institutional investors appears rooted in historically stretched valuations. The S&P 500's cyclically adjusted price-to-earnings (CAPE) ratio now stands at 40.1, a level not seen since the dot-com crash in 2000.
While high valuations are poor predictors of short-term market timing, they have been a reliable indicator of lower long-term returns. Historical data shows that following periods where the CAPE ratio exceeded 40, the S&P 500's average return was negative over the subsequent one- to three-year periods. In contrast to the institutional selling, passive funds saw massive inflows. The popular Invesco QQQ Trust (QQQ) recorded its largest-ever monthly inflow of $10 billion in April, while semiconductor ETFs took in nearly $5 billion, signaling continued bullishness from other market segments.
This article is for informational purposes only and does not constitute investment advice.
