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With the earnings season about to start, the chart illustrates why the fate of the Indian markets depends on the ability of Q4 earnings to beat expectations.

As the chart shows, the Indian market is one of the most expensive in the world, immediately after the US, according to estimates from Citi Research.

At the current forward price-earnings multiple, the valuation for the Indian market is well above its mean.

To be sure, abundant liquidity, both from foreign and domestic investors, has been driving up stocks.

As the outlook for investment in real estate and gold has faded, investors have switched to equities.

But the record shows that markets fell in 2010, 2015 and 2016 from levels only slightly above current valuations. It’s time for earnings to catch up and for investors to be cautious.

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