Mumbai: The Nifty 50 index touched 10000 points in intraday trades on Tuesday, triggering fresh questions on the sustainability of the current market rally and the valuation of stocks.

On Tuesday, the index opened at 10010.55 points, up 0.44% from its previous close, crossing 10000 for the first time ever. It quickly retreated from those levels and ended the day almost flat at 9964.55. The other benchmark index, BSE Sensex, also hit a peak of 32374.30 before closing lower.

Analysts say the continued rise in markets is explained by a combination of factors: early June quarter results showing more hits than misses, a good and widespread monsoon, continued preference for Indian shares among foreign investors and expectations of an interest rate cut when the Reserve Bank of India (RBI) reviews monetary policy next week.

Nifty at 10000: Stocks running ahead of fundamentals, warn analysts

“The markets are largely driven by liquidity while structurally things are improving both at macro- and corporate levels," said Ravi Gopalakrishnan, head of equities at Canara Robeco Mutual Fund. But “earnings support will be crucial for the markets to continue rally", he added.

That earnings support is crucial because the run-up in markets over the past few months—around 21% since the start of the year—has entirely been fuelled by liquidity rather than a belief in better earnings growth.

The Nifty is trading at nearly 18 times its expected earnings for the next 12 months. The Sensex has a higher multiple of 18.6 times. That makes India one of the most expensive markets in the world. The MSCI Emerging Markets Index is trading at a price-earnings multiple of 12.7 and MSCI World, a proxy for developed markets, at 16.6.

ALSO READ: Nifty hits 10,000. Here’s how it got there

“We are concerned about market valuations getting frothy and wary of investors buying at elevated levels," said Saurabh Mukherjea, chief executive officer at Ambit Capital. “The markets are rising with no fundamental support while earnings growth is not expected."

Indeed, while early earnings trends look positive, there is still uncertainty about the impact of the goods and services tax implemented at the beginning of this quarter.

The transition to this new tax had led to lower inventories and destocking of goods in company supply chains. Investment demand has still not picked up.

According to a note by UBS Securities India Pvt. Ltd, “the current all-time high Nifty valuations can be justified only if we presume double-digit growth into perpetuity".

The brokerage said it has revised its base case (or most probable) end-2017 Nifty target to 9,000. Even its most optimistic target is 10,000, which shows no upside from current levels.

ALSO READ: Did the Nifty just have its ‘paanwala’ moment at 10,000?

“The risk-reward fundamentally is clearly unfavourable but we acknowledge that local retail flow can keep markets elevated despite the absence of a near-term growth recovery," it said. Domestic institutional investors have invested Rs24,000 crore in Indian stocks so far this year and this is expected to continue as retail investors buy mutual funds.

To be sure, there are others such as Dhiraj Sachdev, senior vice-president and fund manager, equities, at HSBC Global Asset Management, who are betting on earnings to improve in the second half of this year, driven by lower interest rates, higher real wages and the government’s push to increase rural and farm income.

“We are fairly positive on the markets as India is at its best on the macro economy front," said Sachdev.

On Monday, the International Monetary Fund kept its outlook for India’s gross domestic product growth rate unchanged at 7.2% in 2017-18 and 7.7% in 2018-19.

Close