Samvat 2076 has started with pomp and show. The music's playing, the spotlight is on the tango of the bulls, and investors are heartily cheering the show. This sums up the mood on Dalal Street for the past few trading sessions. The S&P BSE Sensex, the barometer of the financial market, closed above 40,000 points on Wednesday, after a gap of nearly five months.

The Sensex reclaimed over 4,190 points in matter of 27 trading sessions, since September 19 when the 30-stock index touched its lowest—35,987.8 points—between the two 40,000-plus closes. This is noteworthy, since the news flow during this period has reiterated the view that the domestic economy is struggling to cope with the double whammy of low investment and consumption.

Dismal earnings, coupled with bleak management commentary, also depicted a worrisome picture of the state of affairs. Banks, non-banking finance companies, and the auto sector remain vulnerable to the liquidity squeeze. Kotak Mahindra Asset Management Company MD and CEO Nilesh Shah says India is going through a “samudra manthan” [a churning of the ocean]. But he adds that India is a long-term structural growth story with ups and downs, and “It will always reward disciplined long investors."

In an interview with Fortune India, Mark Matthews, head of research-Asia, Julius Baer, said, “The stock market tends to lead the economy by around six months. So, the inference in its recent performance is that the economy is going to pick up.”

In fact, market veterans point out, the party has started. This, one can deduce from the broader performance of the equity market in the five weeks, and more specifically the last three trading sessions. Fundamentally, one may argue, not much has changed on the ground to explain the euphoria. But experts say we are in a bull market.

“We are in a bull market. The economy is coming back on track and we are clearly overdone on consumption pessimism. This is clear from the advent of euphoric car sales this festive season. The cut in tax rate is also boosting market sentiment. And, with its ambitious disinvestment plan, the government has set the cat among the pigeons,” says Sanjiv Bhasin, executive vice president, IIFL Securities.

Shah points out that small- and mid-cap companies are trading below the historical average. “For an investor who has risk appetite, current valuations of small- and mid-cap companies are attractive,” he says. He sees better growth opportunity in select companies across tech, pharma, cement, financial services, and FMCG sectors.

“My sense is 2020 will be a repeat of 2017 for select mid-cap stocks in banking, cement, and consumption-related sectors,” adds Bhasin. He says investors could earn returns of two to four times at current valuations in the next 18-20 months. The chatter around a possible delay in the trade deal between the U.S. and China, rate cut expectations from the U.S. Federal Open Market Committee meeting, and indications of a decision on Brexit being pushed back also buoyed investors' sentiments.

But beyond the Sensex and the Nifty 50, other key indices have had a dismal show between the all-time high of the Sensex and the Nifty 50 on June 4 and Wednesday. Barring the S&P BSE FMCG and S&P BSE Auto indices, which grew 5.38% and 0.82% on an absolute basis, the other indices have not fared as well as the Sensex. While the S&P BSE SmallCap and MidCap indices saw an absolute decline of 9.92% and 3.39%, Telecom, Realty, and Bankex declined by 13.621%, 7.97%, and 4.69%, respectively.

Rajesh Palviya, the head of technical and derivatives research at Axis Securities, expects the Sensex to rally 500-800 points in the next one week. “The Sensex is about 350 points away from a fresh high. We expect the rally to continue and the markets may touch an all-time high in the first week of November. Consolidation in the market is over, and we saw a V-shaped recovery breakout post-Diwali. With the current formation we see a potential upside of 40,500 to 40,800 points,” Palviya says. The market may test a new support level at 39,100 and 39,500 towards the end of the quarter, Palviya adds.

The Nifty Midcap and Nifty Bank indices hit a one-month high. The market breadth also improved as more than 32 stocks listed on the BSE saw fresh lifetime highs. The rally was largely led by the banking and auto companies.

Critics may question the market for defying logic and ground reality, but the music is playing, and the bull tango is far from over. As Shah says, “The stock market always discounts the future. The market is hopeful about the future as subdued oil prices and an above-average monsoon have been favourable for the economy. Some steps that have been taken by the government and regulators over the years will benefit the economy.”

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