- Big money favors cyclical stocks, a sign of growing confidence.
- The stance reflects faith in the Fed’s ability to reduce inflation.

Professional investors are loading up on bets that an economic downturn can be avoided despite all warnings to the contrary. It’s a dangerous gamble, for a variety of reasons.
Money managers have been favoring economically sensitive stocks, such as industrial companies and commodity producers, according to a Goldman Sachs Group Inc. study on the positioning of mutual funds and hedge funds with assets totaling nearly $5 trillion. Stocks that tend to perform well during economic downturns, such as utilities and consumer staples, are currently out of favor, according to the analysis.
The positions amount to bets that the Federal Reserve can control inflation without creating a recession, a difficult scenario to achieve often referred to as a soft economic landing. The precariousness of such bets was on display on Friday and Monday, when strong readings in the U.S. labor market and services sectors fueled speculation that the Fed will have to maintain its aggressive policies, raising risks of a policy error.
“The sector’s current tilts are consistent with positioning for a soft landing,” Goldman strategists including David Kostin wrote in a note on Friday, adding that fund industry thematic and factor exposures point to a similar stance.
It’s not that smart money has taken a chance. They have increased cash holdings or boosted bearish bets on stocks this year as the Fed embarked on the most aggressive inflation-fighting campaign in decades. But underneath the defensive posture is a cyclical tilt, one that is at odds with widespread concerns among the investment community that a serious economic contraction is on the horizon.
In a Bank of America Corp. survey of fund managers last month, a net 77% expected a global recession in the next 12 months, the highest proportion since the immediate aftermath of the 2020 Covid crisis.
Professionals may be slow to adjust their portfolios to reflect perceived economic risk. Or they are seeking protection from recession through other strategies, such as parking cash.
A more plausible explanation is linked to hopes that the Fed could design a soft landing. In this case, the bad economic news is seen as good for the market, as it shows that Fed Chairman Jerome Powell’s inflation-fighting campaign is working and therefore policymakers may backtrack on the aggressive pace of interest rate hikes.
The narrative, described as a pivot by the Fed, is widely cited as the reason the S&P 500 has rallied more than 10% from its October lows despite worsening data in areas such as housing and manufacturing and a reduction in earnings estimates.
Now, the opposite is happening. The shares sold off on Monday after an unexpected rise in a U.S. services gauge sparked fears that the Fed will have to stick to its hard line. The S&P 500 fell 1.8%, extending Friday’s losses, as stronger-than-expected jobs report ignited nervousness about Fed policy after Powell signaled a possible downward shift in the pace of tightening.
“If growth deteriorates too quickly or goes too far, then ‘bad news is bad news will outweigh the narrative,'” JPMorgan Chase & Co.’s sales and trading team, including Andrew Tyler, wrote in a note Monday. “In that scenario, markets are likely to retest the 2022 lows.”
Source: Bloomberg
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