[Fundamental viewpoint]
Last week on the US markets, share indices fell over the week as concerns over the high valuations of AI-related stocks and diminishing expectations for further interest rate cuts by the Federal Reserve took hold.
Weekly change rate: NY Dow: -1.91%, NASDAQ: -2.74%, S&P 500: -1.95%.
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 1.57 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 22.4 and the Nikkei 225's P/E ratio of 18.1 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 1.57 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 25.2 Or, the Nikkei 225 will be around 67,800 yen.
As a result, the Japanese market is undervalued by about 19,800 yen in the medium to long term.
From a fundamental perspective, the Japanese market could be said to be approximately 19,800 yen less attractive than the US market. Last week, the weakness in the Japanese market diminished.
[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 2026 GDP estimate (now +2.5%) by OECD
⑤ Foreign investors over-buying
Looking at recent movements
① The weekly leg of the NYDow was negative last week. The daily is above the 200-day line and within the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was negative. The daily is above the 200-day line and within the clouds on the Ichimoku Chart. This week, the focus will be on whether the NY Dow can keep above the 200-day line.
② Following the announcement of financial results, the projected ROE for Nikkei 225 constituent companies stands at +8.9%. This remains unchanged from three months ago. The profit growth rate is -3.4%, representing an improvement of +3.1 percentage points compared to three months ago.
③ US long-term interest rates declined, and although the interest rate differential between Japan and the US narrowed from 2.45 to 2.29, the dollar-yen exchange rate moved in a yen-weakening direction within the range of 154 to 157 yen. The dollar index rose by +0.93% 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 second week of November saw net buying, while the third week likely saw net selling; net selling is anticipated this week. Last week, out of five points, ① was a bearish factor.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 8.7 percentage points (equivalent to approximately ¥4230 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 13.4 percentage points (equivalent to approximately ¥6520 for the Nikkei average) relative to the NY Dow's 200-day moving average deviation rate over the same timeframe.
The Japanese market is showing greater strength than the NY Dow and NASDAQ. The VIX, an indicator of volatility in the US market, rose to 23.5 over the week. The Nikkei VI rose to 37.3 over the week. The US market is in a state of ‘mood of suspicion’, while the Japanese market is in a state of ‘fear’.
The Nikkei average is below the 9-day and 25-day moving averages. A red light is flashing for the short-term trend.
The Nikkei average is above the cloud in the Ichimoku Kinko Hyo chart. The overall deviation rate stands at +21.3%, while the deviation rate from the 200-day moving average is +18.8%. With all three factors positive, a green light is flashing for the medium-term trend.
In the US market, the NY Dow is below the 9-day line and 25-day and above 200-day lines. It is within the clouds of the Ichimoku chart.
The NASDAQ is below the 9-day line and 25-day and above 200-day lines. It is above the clouds within the Ichimoku Chart.
It is a ‘red light’ in the short term and a ‘yellow 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 no trend and a short-term down trend. The Japanese market is in a medium-term up trend, and the short-term is down trend.
Analysis of the foreign exchange market indicates that the yen has shifted towards depreciation, with the low of 139 yen reached in April 2025 marking the bottom. This week, the yen is expected to trade between the 155 and 157 yen per dollar range.
This week in the US market, government agencies are set to continue releasing data delayed by the federal shutdown. Key releases include the Producer Price Index, Retail Sales, and Durable Goods Orders. Major housing price indicators are also scheduled for release. Meanwhile, globally, the UK Budget, inflation rates across EU nations, and consumer confidence indices are among the data releases planned.
Last week, the Nikkei average fell below the projected range. The upper limit was around 670 yen, while the lower limit dipped below 510 yen.
This week, the Nikkei average is expected to move within a projected range: the upper limit at the 25-day moving average (currently around 50,100 yen) and the lower limit at the Bollinger Band -2σ (currently around 47,820 yen).
This week, the Nikkei average is likely to remain subdued unless concerns over the high valuations of Japanese and US AI-related stocks and the retreating prospects of further interest rate cuts by the Federal Reserve are dispelled.
