(This story is for CNBC Pro subscribers only.) Stock valuations are approaching extreme levels last seen during the dot-com bubble, with the some of the largest risk hidden in the technology darlings that led the market rebound, according to Barclays. The Wall Street firm said that even after the recent pullback, stock valuations are at their 2000 dot-com peaks, forcing Barclays to downgrade the FANMAG (Facebook, Amazon, Netflix, Microsoft, Apple and Google-parent Alphabet) sector to market weight given the stretched valuations. "Measures of equity valuations are now at 2000 dot-com bubble levels and appear to be pricing in an ideal scenario where there will [be] an extremely strong cyclical recovery driven by a vaccine, the market shares gains from the 'Resilient' (large cap tech) stocks will accelerate, and US presidential elections will not pose a significant headwind to risky assets," U.S. equity strategist Maneesh Deshpande told clients. "We continue to recommend a selective equity exposure." U.S. equities have experienced an epic rebound from the coronavirus market rout in March. Led by megacap technology companies, the S & P 500 and Nasdaq Composite have notched all-time highs during the pandemic. The sell-off in the major averages in the past few weeks has been driven mostly by a decline in large-cap technology stocks, like FANMAG, which may signal that some investors are concerned about the group's lofty valuations. "Large cap tech stocks (FANMAG) have driven most of the rally for global equities, and we think this leadership will be challenged as the cyclical recovery takes hold," Deshpande said. However, Barclays said that even after the recent pullback, the current level of the index price-to-earnings ratio is elevated relative to the recent levels and approaching the dot-com bubble peak, when internet stocks rose and eventually collapsed, shedding nearly 80% of value within seven months. Barclays said the premium in the market is being driven by "resilient" stocks, whose business model flourished during this crisis, along with certain cyclical stocks, like software and industrial. "The downturn was not as bad as initially expected, and a stronger cyclical recovery seems possible assuming a successful vaccine this year, followed by wide dissemination by the middle of next year," Deshpande said. "Some premium in the Resilient stocks looks justified given that these 'Growth' stocks proved to be 'Defensive' this year, but current levels are excessive and likely driven by retail flows." Despite the downbeat tone about equity valuations, Barclays updated its S & P 500 price target for 2020 to 3,100 from 2,800, primarily driven by an improvement to 2021 earnings forecasts. The firm raised its 2021 EPS estimate to $160 per share from $150, slightly below consensus. "We are reluctant to chase the rally by paying above the elevated market multiples and update our price target to 3100, which embeds a P/E ratio that is half-way between the peak level over the past five years and current level," Deshpande said. — with reporting from CNBC's Michael Bloom.
