Just 68 days ago, on November 15, a Morgan Stanley research note authored by Ridham Desai and Sheela Rathi left many market veterans astonished. Desai, Morgan Stanley’s star equity strategist, and Rathi, the firm’s equity analyst, had written that the bull run that began in March 2020 continued, and while there could be corrections along the way, the equity market was likely to have more legroom to stretch itself before it topped out.

Interestingly, Desai and Rathi had added that the coming growth cycle was not fully priced in, and hence, they saw more upside to the index. “By our estimates, the market will be trading at 16 times forward earnings at our new BSE Sensex target of 50,000 in December 2021,” Desai and Rathi had written.

While the broader economic indicators pointed towards improving conditions in mid-November, a full recovery was seen too far to reach. In that light, the prospect of the Sensex breaching the 50,000-mark was seen to exist in the realm of the improbable for market veterans, at least for the short term. But, 68 days later, on January 21, this has become a reality. The Sensex has zoomed past the 50,000 mark to hit a new lifetime high of 50,149.49 points.

But what is the significance of this?

If one looks back at the last calendar month of the year gone by, since December 1, the 30–stock benchmark has added over 6,050 points (+13.7%). And, a full recovery of over 24,529 points has been achieved in 209 trading sessions since March 24 last year, when the Sensex dipped to its prevailing 52–week low of 25,638.9 points. At the current life–high, the percentage recovery from the 52–week low point is nearly 96%.

However, the reasons that contributed to this so–called ‘mother of all bull runs’ are mostly international. “The liquidity expansion by the central bank and the ample FII [foreign institutional investors]-driven liquidity, a V–shaped recovery of growth aided by the discovery of the vaccine, and most recently the change of guard in the U.S. have been some of the factors propelling markets higher and higher,” says Joseph Thomas, head of research, at Mumbai–based Emkay Wealth Management.

Going by the December 1 yardstick, within 36 trading days until January 20, FPIs [foreign portfolio investors or FIIs] have pumped in a whopping ₹82,252 crore into equities, while there were net outflows of ₹2,095 crore in just four of the 36 trading days. In dollar terms, the net inflows in equities work out to nearly $11.2 billion, after factoring in the net outflow of $286 million over the four trading days.

While the Sensex’s journey beyond 50,000 points has invited investor scepticism, Nilesh Shah, group president & MD, Kotak Mahindra Asset Management Company, compares the Sensex touching 50,000 points in 2021 to the Indian cricket team winning the test series in Australia against all odds. “While economic data is about the past which is improving month on month, the Sensex is reflecting the positivity about the future,” says Shah, who has been a member of the Economic Advisory Council of Prime Minister Narendra Modi since October 2019.

But, this optimism is not shared by market experts at large, who advise caution. “As the Sensex crosses 50,000, the valuations do look stretched,” says Emkay’s Thomas. “The valuations are a function of earnings, and earnings not coming through remains the key risk at the current juncture,” he adds.

While calling it a momentous day for India’s capital markets, Deepak Jasani, head of retail research, HDFC Securities, points out that expectations of a turnaround in the economy post the Covid-19 vaccinations and continued FPI inflows have led to these gains, especially in a globally low interest scenario. “Post the forthcoming Union Budget we may witness a temporary brake to the uptrend and, further up, moves from hereon will depend on the pace of economic and corporate earnings growth, and the trajectory of inflation and interest rates in India and the world,” says Jasani.

But for Ashwin Patni, head of products and alternatives at Axis Mutual Fund, it is just another peak. He says that like other peaks over the last 40 years, there is jubilation and wonder about the Sensex touching 50,000. “While it might seem momentous, these levels and dates, in reality, mean nothing at all,” Patni says in a reaction note.

According to Patni, an index like the Sensex is ultimately a broad representation of the performance of the market. Hence, when someone says the index has risen 50 times in 40 years, it is a representation of how the Indian equity markets have fared over this period. “This growth has come through periods of booms and recessions and across bull and bear markets,” Patni adds. “So for investors or observers, the greatest lesson is also the simplest lesson—that India has long-term structural tailwinds which will allow us to keep growing, and these trends are far more powerful than shorter-term cyclical ups and downs as far as wealth generation is concerned.”

Beyond the broader benchmark indices like the Sensex and Nifty 50, the narrower indices, like the S&P BSE MidCap and the the S&P BSE SmallCap, have also seen a recovery. Since the recent historic low of March 24, the MidCap and SmallCap indices have, recovered over 9,779 points and 10,263 points, respectively, on an absolute basis when compared to the day’s high of January 21. In absolute percentage terms, at the January 21 highs, the MidCap and SmallCap have recorded a recovery of 102.3% and 119%, respectively, since March 24.

Going back to the November 15 research report of Morgan Stanley, Desai and Rathi had noted that they expected the broad market SMIDs (small- and mid-caps) to beat the narrow indices or large-caps in 2021. “Because, we think concentration of market cap and profits may have peaked with the return of the growth cycle,” they had argued. “We also think portfolio returns are more likely to be driven by bottom-up stock picking rather than top-down macro forces, so keep sector positions narrow,” they had advised.

So far, stronger global factors have helped drive the stupendous gains for the Sensex. But, the way the Reserve Bank of India has been building its foreign exchange reserves—which were at a lifetime high of $585.3 billion at the start of January 2021—a global contagion is not ruled out. And, if FPI flows turn awry, the tide for the bull market would be the first to get affected. The time is just not right for investors to rush into the market, lured by bumper returns.

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