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Investors are seeing a lot of red in their portfolios this week.
Lackluster unemployment data and Big Tech earnings have stoked recession fears and a global stock-market sell-off. On Monday, the S&P 500, Dow Jones Industrial Average, and Nasdaq 100 all dropped over 2%. Internationally, Japan's Nikkei 225 experienced its biggest daily loss since 1987, plunging over 12%.
To some Wall Street bears, this correction has been a long time coming. A narrow selection of mega-cap names has largely driven this year's S&P 500 rally, and now it looks like the market is finally due for a correction.
The activity of the biggest market players, such as hedge funds with billions of assets under management, can provide insight into the current market upheaval. In a recent note, Bank of America's Head of US Equity and Quantitative Strategy Savita Subramanian and her team took a look at which stocks hedge funds are betting against.
Bank of America screened S&P 500 stocks with the most short interest as a percentage of float and found seven stocks with over 10% total short interest. Typically, over 10% of a company's total float — or amount of shares trading on the open market — being shorted is a signal of negative sentiment, and over 20% is considered especially alarming. Historically, hedge funds and institutional investors constitute the biggest proportion of conventional short sales. Bank of America estimates that hedge funds are responsible for 85% of the total short interest in stocks.
Some parts of the market are getting pummeled more than others, according to the bank's analysis. Consumer discretionary is the most shorted sector, while financials is the least.
Overall, consumer discretionary stocks have lagged behind the rest of the S&P 500 this year, indicating lackluster consumer confidence. In the first six months of 2024, consumer discretionary stocks rose a paltry 5% compared to the 15% gain posted by the rest of the index.
There are quite a few indicators that point to depressed consumer activity: interest rates have remained high so far this year, credit card delinquencies are creeping up, and last Friday's employment report revealed a tepid job market.
With less disposable income, consumers are cutting back on major household expenditures such as vacations and cars, according to LPL Financial's Chief Economist Jeffrey Roach. That's hitting the airline and auto industry hard. Consumers are also downsizing on smaller expenditures, such as cutting the cord on various streaming subscriptions.
Other areas of the market that hedge funds are also bearish on include human capital management companies and renewable energy. Investor sentiment is being dampened by high interest rates and a cooling labor market.
Below are the top seven stocks that hedge funds are betting against, their one-year performance, and their short interest as a percentage of float.
