Here are 5 questions that are top of mind for investors as the S&P 500 wavers and the Fed enters its next policy phase

• Barclays outlined the top questions investors are asking as the S&P 500 looks stuck in a tight trading range.
• "What will be the likely turning point to break the market higher or lower?" are among the inquiries.

With large-cap US stocks essentially meandering and the Federal Reserve seemingly at a policy crossroads, what's next for the $40 trillion equity market?

Barclays in a note Tuesday addressed five questions clients are asking at a time the S&P 500 continues to move rangebound as it has been since the middle of the first quarter.

Equities since last week, however, have tilted downward after the Fed delivered its 10th consecutive rate increase in its battle against inflation. Policymakers signaled a likely pause at their June meeting but also introduced a tightening bias and indicated they might raise rates further if warranted, Venu Krishna, Barclays' head of US equities strategy, wrote to clients in a note published Tuesday.

The S&P 500 is likely to remain rangebound in the short-term, Krishna said. "However, beyond the short term, we think the risk/reward for equities is asymmetric - there is limited upside but more downside."

Here are the 5 questions investors are asking:

1) What will be the likely turning point to break the market higher or lower?

The "unknowns" that hold the potential to drive the direction of travel fall into three overall categories: 1) something "breaking," or a tail event; 2) negative revisions cycle bottoming, and 3) the Fed's course of action.

Estimating the probability tied to a given tail risk is difficult but the market has handled the last several risk events with "remarkable composure," said Krishna. Those risks include the COVID outbreak, with stocks recovering from that resulting bear market earlier than anticipated.

"What this tells us is that positioning and responsive policymakers make it unlikely for a tail event (absent a true liquidity crisis) to substantially derail equity values and break the market lower," he said.

Tail risks aside, markets may be lulled into thinking hurdles - just as the current earnings recession – can be cleared in record time.

"We think it is too early to call the bottom on FY23 considering earnings growth is still negative and results have been a mixed bag beneath the headline beat," Krishna said. "Trough earnings are a reasonable catalyst to break the market higher but we don't think we are there yet given the deteriorating macro backdrop."

2) When is the Fed likely to start cutting and how will equity markets react?

Financial markets appear to be pricing the unlikely scenario of a recession that quickly pulls down inflation and keeps rates low while corporate earnings are relatively unscathed.

"The only outcome in which we see the current rates curve as accurate (Fed begins cutting in 2H23, accelerating in 2024) is the Fed responding to a fairly severe recession, which obviously does not bode well for equities," Krishna said.

The baseline view from economists at Barclays is that Fed leaves its key rate unchanged through the end of 2023 as the economy enters a mild recession in the second half of the year and upside inflation risks lurk.

"Relative to the '2023 pivot' scenario, we view the 'higher for longer' outcome as the lesser of two evils," Barclays said. That scenario tilts the balance of risk toward its base case of a shallow recession base case and an S&P 500 price target of 3,725. The S&P 500 during Tuesday's session was at 4,125.

3) The buy side is probably closer to our $200 EPS estimate, but if that's the case why are equities rallying?

"We think buyers have been overly eager to capture trough earnings, driving multiple expansion," said Krishna. Mega-cap Internet stocks have fronted price gains through the first quarter earnings, with companies offering a node toward recovery in some areas.

"While we are confident in another reset to S&P 500 '23 forward earnings, there is clear demand for sectors that may be closer to the bottom of the EPS revisions cycle than others, amplified by lopsided positioning."

The price-to-earnings ratio has come off October lows, to roughly 18.5-20.5 times earnings from 15.5 times earnings, putting current consensus estimates at $221 for per-share earnings from S&P 500 companies. Barclays said its top-down valuation framework points to 18.5 times forward EPS as fair value only when inflation recedes and economic growth is recovering.

4) Why is equity volatility so low and what does that say about risk?

1) Earnings have been underwhelming; 2) consensus has done a better job of estimating macro data prints, and 3) correlation has been low, it said.

"We caution against interpreting low equity volatility as a definitive sign that we are out of the woods, as macro remains fundamentally challenged," Krishna said.

The stock market's so-called fear gauge, the CBOE Volatility Index, was at 17.39 during Tuesday's session, slightly higher than this year's lows above 15 and below the long-run average of 20.

5) How do you play the current environment?

Thematic plays offer better risk/reward, said Barclays. It prefers large-cap stocks to small-caps, less-expensive Quality names, stocks with high sensitivity to core services inflation and US companies with revenue exposure to China.

"Recent choppiness in Tech and Financials highlight individual sector risks in a late-cycle environment dominated by macro uncertainty and tightening credit, particularly as stagnant forward EPS causes valuations to fluctuate wildly," the investment bank said.