Ultra-low interest rates in the US and other developed markets have fuelled a rush of funds into stocks worldwide, although the Sensex has outperformed most global indices. The Sensex is still some 2,000 points below the lifetime high it reached in January 2008 and whether it will cross that peak depends on continuing liquidity. The Sensex price-earnings (P-E) multiple is now at around 16.7 times the average of consensus earnings per share estimates for FY11 and FY12, which is not cheap. Its trailing P-E is now 22.83, the level it reached in late September 2007. Note also that Monday’s rally was led by bank stocks, which shows that the market is convinced that growth will remain robust despite any tightening by the Reserve Bank of India on Thursday.
Also See Market Surge (PDF)