Stocks are near a bull market but downside risks loom, says Barclays

The benchmark for the largest stocks in the US is knocking on the door of a bull market, hoisted from lows in part by investors optimistic about prospects for the economy. But Barclays says the case for a sustainable new bear market is a stretch for now.has crept up nearly 18% since hitting a low of 3,491.58 in October when investors shoved the index further into a bear market, shaken largely by the Federal Reserve's rapid rate hikes.

"However, we think we still have a ways to go before seeing the trough," he continued."Valuations can remain irrational for a time but earnings cannot, and if the history of recessionary bear markets is a guide, both sides of the P/E multiple remain exposed to asymmetric downside risks." But Barclays sees valuations as"too optimistic" relative to its base case for a shallow recession and $200 in per-share earnings collectively for S&P 500 companies in 2023.

Investors are looking through an earnings contraction this year to an implied rebound in 2024 and positioning is making it"far more punitive" to be late than early. Mutual funds and hedge funds, for example, were caught sharply underweight the tech sector ahead of the recent flight-to-quality moves.

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