The Sensex ended down 356.46 points or 0.95% at 37165.16 on Thursday.
"Our sentiment indicator (CISI) suggests modest 12-month-forward returns; we roll to Mar19 (from Dec18) and raise our Sensex target to 37,300 (from 35,700)," said Surendra Goyal and Vijit Jain of Citi in a note. "Strong earnings (low base + some pick-up) could help near term, but tough macro, crude, election cycle, widening earnings yield gap,
and valuations (18x+ PE, 60% premium to EM) are variables to watch," added Citi.
The firm said earnings growth in the first quarter stands at 13% year-on-year excluding Tata Motors and corporate banks.
"There is much to like in the numbers reported so far —Revenue/EBITDA growth for the companies that have reported so far (54/100) is 20%+ and in line…FY19E earnings growth forecasts at ~25% are building in a significant recovery," said Citi.
Citi said that in a tough year for emerging market equities and FII flows, domestic flows have continued to support Indian equities, while FII flow trends remain lackluster. Consequently, valuations in India have remained elevated, while emerging markets have seen a significant correction this year, said Citi.