(Bloomberg) -- Wall Street strategists are rushing to raise their targets for the S&P 500 Index, but hedge funds are growing increasingly cautious about equities due to the Federal Reserve’s reluctance to cut interest rates, softer economic data and narrow stock market breadth. 

Hedge funds decreased their long-short gross leverage, which measures their overall exposure to the market, by the most since March 2022, according to a note from Goldman Sachs Group Inc.’s prime brokerage desk. The move points to a more cautious stance from the so-called smart money, Goldman’s team wrote.

The funds were net sellers of US equities last week, with the selling largely in macro products such as index funds and ETFs. However, hedge funds were net buyers of single stocks for the first time in six weeks, a potential indication that investment managers are becoming more selective.

“We think US growth is priced optimistically and think there is some cause for pause on the US consumer,” the Goldman team wrote. “Nuance is needed and we are most worried about trade-down risk and the state of the low-end consumer.”

The S&P 500 is sitting near an all-time high above 5,400 after rising 14% in the first half of 2024. Wall Street market strategists are rushing to keep up by increasing their year-end targets for the S&P, the latest being Evercore ISI’s Julian Emanuel, who on Sunday boosted his to 6,000, the highest among major equity strategists tracked by Bloomberg. On Friday, Goldman’s David Kostin lifted his target to 5,600, up from 5,200 he predicted just four months ago.

Read: JPMorgan Asset Management Sees Stocks Powering On in Second Half

Hedge funds however appear to be more skeptical about further gains from here. The Fed is signaling that it expects to cut rates fewer times than investors had hoped in 2024 as inflation remains stubborn. And economic growth remains uncertain with geopolitical risks seemingly everywhere. 

Meanwhile, stock market breadth remains very narrow with gains largely driven by big tech stocks, while economic-sensitive cyclical stocks remain under pressure. The divergence is clear in the performance of the regular cap-weighted version of the S&P 500 and its equal-weighted cousin. While the cap-weighted S&P is near overbought territory, the equal-weigh S&P isn’t, gaining just 3.4% this year, far short of the cap-weighted S&P’s return and nowhere near the 35% leap in the the Bloomberg Magnificent 7 Total Return Index. 

Read: Big Tech Is Driving the S&P Rally. The Rest Have to Step Up Soon

“Narrow breath increases the market fragility,” said Mark Connors, head of global macro strategy at Onramp Bitcoin. “That is the reason why hedge funds’ leverage has come down and they rotated from macro products to single stocks.” 

--With assistance from Matthew Griffin.

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