Investing.com -- The recent sell-off in S&P 500 marks the most rapid decline in the index since 2022, with Big Tech valuations now being the cheapest in nearly two years, according to Barclays.

The downturn has brought the S&P 500 very close to its two-year median valuation of 20 times next twelve months (NTM) earnings per share (EPS), a level previously identified as a critical support point.

“Current valuation reflects Big Tech (25x) and the rest of Tech (23x) trading at the cheapest NTM multiples in over a year, and SPX excluding-Tech catching down to our fair value estimate, now pricing in flattish inflation and low (but still expansionary) growth from current levels,” strategists led by Venu Krishna said.

The sell-off, while orderly, has mirrored the heightened growth concerns last seen in 2022. There has been an increase in equity and credit risk premiums from their record lows, alongside a declining Treasury term premium.

However, realized equity volatility remains contained. If the market continues to weaken, the total multiple compression could reach levels comparable to those seen in previous bear markets, the strategists said.

At the current level, the strategists see equity valuations as “reasonable.”

The S&P 500 is trading at approximately 20 times NTM EPS, which is below their bear case multiple, despite an improving macro backdrop over the past 12 months and relatively stable fourth-quarter 2024 earnings and guidance.

They attribute this to heightened uncertainty surrounding inflation, economic growth, and expectations around Federal Reserve policy support.

Due to this backdrop, Barclays recommends investors to selectively add to their equity positions in their preferred sectors while awaiting more clarity on policy direction.

A further drop in the S&P 500 below 20 times NTM EPS could indicate a marked increase in growth worries, the bank notes, as consensus estimates might begin to reflect higher inflation and lower economic activity in response to U.S. policy changes.

“Trimmed PCE going to 3%+ and manufacturing PMI back below 50 takes at least another turn out of SPX ex-Tech fair value and we doubt Tech would be immune,” the strategists said.

Sector-wise, Barclays maintains a positive outlook on Healthcare, citing its potential to generate excess returns due to reasonable valuations, positive earnings cyclicality, and a defensive stance.

While Big Tech valuations have undergone substantial de-risking, Barclays remains positive on the sector for the long term. However, the firm anticipates few near-term catalysts for Big Tech, given the mixed guidance for the March quarter and ongoing capital expenditure concerns.