[Fundamental viewpoint]
Last week in the US markets, expectations of further interest rate cuts by the Federal Reserve fuelled optimism about the US stock market outlook, leading to weekly gains in stock indices.
Weekly percentage change: NY Dow: +1.10%, NASDAQ: +1.32%, S&P 500: +1.09%.
On the other hand, medium- to long-term
risks include concerns about a prolonged conflict in Ukraine, tariff policies
of the U.S. administration, financial instability and global economic slowdown
due to rising interest rates, and the collapse of the real estate bubble and
economic slowdown in China. This also raises concerns about the arrival of
stagflation. Furthermore, geopolitical risks in East Asia and the Middle East
continue to require attention..
The difference in the yield spread between the Japanese and U.S. markets is 1.87 points undervalued for the Japanese market when the OECD's nominal GDP forecast for 2026 is taken into account. The reason for the undervaluation is the difference between the S&P 500's P/E ratio of 23.4 and the Nikkei 225's P/E ratio of 18.3 the difference between the U.S. and Japanese interest rates, and the difference in GDP growth rates.
In order for the U.S. and Japanese markets to be in equilibrium, the following conditions must be met.
The difference in GDP growth between Japan and the U.S. in 2026 relative to the current price of the Nikkei 225 will be 1.87 percentage points larger than the OECD forecast. (Japan is revised downward or the U.S. is revised upward). Or the current year's forecast PER for stocks in the Nikkei Stock Average becomes about 27.7 Or, the Nikkei 225 will be around 69,500 yen.
As a result, the Japanese market is undervalued by about 23,730 yen in the medium to long term.
From a fundamental perspective, the Japanese market could be said to be approximately ¥23,730 less attractive than the US market. Last week, the weakness in the Japanese market narrowed.
[Conditions for Nikkei average rise]
In the future, the following assumptions are necessary for the Nikkei average to rise further.
① Rising US market
② Increase in profit forecast for the current fiscal year above the previous year's level
③ Further depreciation of the yen due to the widening interest rate gap between Japan and the U.S.
④ Upward revision of Japan's 2025 GDP estimate (now +3.3%) by OECD
⑤ Foreign investors over-buying
Looking at recent movements
① The weekly leg of the NYDow was positive last week. The daily is above the 200-day line and above the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was positive. The daily is above the 200-day line and above the clouds on the Ichimoku Chart. This week, the focus will be on whether the NY Dow can keep above the 25-day line.
② As a result of the financial results announcement, the ROE forecast for Nikkei 225 stocks was +8.9%. This is a deterioration of 0.2 percentage points compared to three months ago. Profit growth was -6.8%. This is a deterioration of 5.5 percentage points compared to three months ago.
③ US long-term interest rates declined, narrowing the interest rate differential between Japan and the US from 2.54 to 2.47. Consequently, the dollar-yen exchange rate moved towards yen appreciation, fluctuating within the range of 149 to 146 yen per dollar. The dollar index fell by -0.48% over the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2026 is expected to be +2.5% for Japan and +4.3% for the U.S., so the Japanese market is 1.8 percentage points inferior in this aspect.
⑤ The fourth week of September saw net selling, while the first week of October likely saw net buying; net buying is anticipated this week. Last week, out of five points, ① was a bullish factor and ③ was a bearish factor.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 0.6 percentage points (equivalent to approximately ¥270 for the Nikkei average) relative to the NASDAQ's 200-day moving average deviation rate on a medium-to-long-term basis. Conversely, it is overvalued by 8.6 percentage points (equivalent to approximately ¥3,940 for the Nikkei average) relative to the NY Dow's 200-day moving average deviation rate over the same timeframe.
The Japanese market is performing more strongly than the NY Dow and NASDAQ. The VIX, an indicator of volatility in the US market, rose to 16.7 over the week. The Nikkei VI fell to 24.8 over the week. The US market is optimistic, while the Japanese market is in a state of “mood of suspicion”.
The Nikkei 225 is above the 9-day line and the 25-day line. The short-term trend is now showing a “green signal.
The Nikkei 225 is above the Ichimoku Kinko's Kumo (equilibrium) cloud. The overall divergence was +29.5%, while the 200-day moving average divergence was +16.6%. As all three factors are positive, the medium-term trend has a "green light".
In the US market, the NY Dow is above the 9-day line and 25-day and 200-day lines. It is above the clouds of the Ichimoku chart.
The NASDAQ is above the 9-day line and 25-day and 200-day lines. It is above the clouds above the Ichimoku Chart.
It is a ‘green light’ in the short term and a ‘green light’ in the medium term.
[Outlook for this week]
Looking at the US market from a fundamental perspective, concerns about an economic downturn remain in the short term. Other risk factors include inflation and rising interest rates due to the Russia-Ukraine war, recession due to energy shortages and deteriorating political conditions in the EU bloc, US-China trade friction, financial market turmoil caused by the bursting of China's property bubble and credit crunch, and expanding geopolitical risks in the Middle East.
Looking at the technical aspects, the U.S. market is in a medium-term up trend and a short-term up trend. The Japanese market is in a medium-term up trend, and the short-term is up trend.
Analysis of the foreign exchange market shows that the yen has turned stronger since topping out at 156 yen, which was reached in January 2025. This week, the yen is expected to be between 148 and 151 yen.
This week in the US markets, the release of government economic indicators is in doubt due to the US government shutdown. Nevertheless, the FOMC minutes are still scheduled for release. Among non-governmental releases, the University of Michigan Consumer Sentiment Survey for October will be closely watched. Globally, the ECB meeting minutes, German industrial production, eurozone retail sales, and Russian inflation indicators are due for release.
Last week, the Nikkei average traded within the expected range. The upper limit fell below 850 yen, while the lower limit rose above 380 yen.
This week, the Nikkei average is expected to move within a range defined by the upper limit at the Bollinger Band +2σ (currently around 46,630 yen) and the lower limit at the 25-day moving average (currently around 44,210 yen).
This week, the Nikkei average is expected to fluctuate depending on the impact of the prolonged US government shutdown, following the celebratory rally triggered by Governor Takaichi's appointment.
