Don't stress. But move the goalposts closer. This helps get the practice in without the frustrating bit that may well put him off or make him feel like he is bad at reading. So rather than reading an entire book because that sounds stressful, do a page of a book, or get some reading sheets - the teacher might have something you can use, or you can literally just google reading practice sheets step by step. Ideally from the same phonics scheme as he's practising, but if the books he's bringing home aren't graduated readers, then don't worry overly about what scheme they follow - there is a load of complete dross online anyway which doesn't follow any scheme at all but it is all practice.
Or skip "reading practice" for a bit and try changing it up by doing "wild reading" instead where you go around the house looking for words in random places, leave the house and see what words you can find out and about. Count how many you can find/set a goal number or see if you can keep a high score. Some of them will be tricky because they will be things like names and made-up words from adverts. Get a label maker and label random things in the house so he's subconsciously reading the word "fridge" any time he opens the fridge, etc. Get a set of those fridge magnets you can make sentences with and leave silly sentences for each other (DS2 absolutely loves this). You can take out the most complicated words and just start with simple ones. You can even buy sheets of pre-cut magnets and make your own set out of vocab lists from school plus some filler words (she, he, and, the, etc). Set up a pulley system and pass notes to each other from the opposite side of the room, or up/down stairs. Set up treasure hunts where each clue has to be decoded using a cipher (for some reason this is 10x more exciting than just reading). If you don't know what to write for clues, ask chatGPT or something. If you have a dog or a younger child, get DC to read to the dog or younger child.
My DC are in a school system abroad where they start later, and we still had this stage with DS2 and he was 7. I was convinced he was dyslexic, and he might still be, but dyslexic or not, a year later he is reading fluently. It's totally fine if they need more time. DS1 taught himself to read with a combination of what he'd learnt in nursery in the UK (basic phonic sounds of the alphabet letters) and some Julia Donaldson books we had, but he was still "late" by UK standards as he was 6. But he is now 18 and doing the local equivalent of A-Levels in two languages, so please do not worry that a "late" start in reading holds them back. It does not. I think DS2 would have struggled massively in the UK system, but he just needed more time. I remember his speech therapist, me, and the preschool specialist all trying to work on rhymes with him, because this is an important pre-reading step apparently, and he could not figure them out at all, literally two weeks before the start of school it suddenly clicked.
Mistaking words which have some similar letters for the same word means he's doing a degree of whole-word recognition, so it will be beneficial if you can slow him down and help him to work out the building blocks of the word ie syllable by syllable or sound by sound. When children struggle with reading they can often jump to the whole-word recognition thing as a masking strategy and then they don't necessarily get the grounding in the building blocks/phonics methods. And there is research that suggests that it is extremely helpful for children who struggle with reading particularly if they can get the hang of this.
But also, if he's really not getting the building blocks thing and he is getting more fluent and making progress anyway, go with your gut. I've also read so many anecdotes of parents and teachers saying that some children struggle with phonics but go on to read fluently in the end anyway, perhaps a little bit later.