(Bloomberg) -- Hedge funds pared exposure to the Magnificent Seven megacap tech stocks in the fourth quarter amid signs of extremes in the market, according to Goldman Sachs Group Inc. 

“Funds were net sellers of most of the Magnificent Seven stocks,” as their weights rose to records, strategists including Ben Snider and Jenny Ma wrote in a note dated Tuesday that analyzed 722 hedge funds with $2.6 trillion of gross equity positions. All seven except Amazon Inc. saw a decrease in exposure, they added.

The changes underscore how investors are increasingly questioning whether the group — comprised of Apple Inc., Microsoft Corp., Nvidia Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Tesla Inc. — can repeat last year’s performance, when an index of the stocks rose 106% versus the S&P 500’s 24% gain. Some strategists have started noting a wide dispersion of consensus growth estimates across the group.

The group’s earnings-reporting season has been mixed. While Meta and Amazon beat expectations, Apple and Tesla saw some weakness. Nvidia’s earnings are due later Wednesday, and traders will be looking for confirmation the company can meet the lofty expectations set amid the artificial-intelligence boom. Option trades are implying an 11% earnings move in the stock, which has tripled in price in the past year.

Microsoft, Apple and Nvidia “ranked among the Info Tech stocks with the largest net decreases in hedge fund popularity, while communication services stocks like Snap Inc. were added, the Goldman team wrote. 

“While trimming mega-cap tech stocks, hedge funds looked for opportunities in cyclicals and some pockets of growth,” the Goldman team wrote. Funds continued to rotate toward cyclicals over defensives, lifting that preference to the highest since 2016 amid strong US economic data and hints of improvement in global manufacturing.

The large degrees of hedge fund crowding, momentum exposure and gross leverage have all aided returns during the past year, but they also point to “the risk of a violent unwind if the market environment shifts,” as briefly occurred during the last several weeks of 2023, Goldman analysts added.

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