Outlook for the Nikkei average this week [19 July 2026]

 [Fundamental viewpoint]

Last week, U.S. markets saw stock indices decline for the week, driven by negative factors such as a sense that the news surrounding semiconductor stocks had run its course and concerns that the dominance of U.S. AI companies was waning.

Weekly percentage change: NY Dow : -0.93%, NASDAQ: -2.90%, S&P 500: -1.55%

                                       

On the other hand, medium- to long-term risks include concerns over military conflict in the Middle East and the prolonged Ukraine conflict, financial instability and worries about a global economic slowdown stemming from the U.S. administration's tariff policies and rising interest rates, as well as fears of a real estate bubble bursting and China's economic slowdown. Consequently, there are also concerns about the arrival of stagflation. Furthermore, continued attention is required regarding geopolitical risks in Latin America and East Asia.

Considering the OECD’s nominal GDP forecasts for 2026, the Japanese market is undervalued by 0.12 points relative to the U.S. market. The factors contributing to this overvaluation include the difference between the S&P 500’s P/E ratio of 21.5 and the projected P/E ratio of 17.3 for companies in the Nikkei 225 index for the current fiscal year, as well as the interest rate differential and the difference in GDP growth rates between Japan and the U.S.

For the Japanese and U.S. markets to reach equilibrium, the following conditions must be met:

Compared to the current Nikkei 225 price, the difference in GDP growth rates between Japan and the U.S. in 2026 must widen by an additional 0.12 percentage points compared to the OECD forecast (either Japan’s forecast is revised upward or the U.S.’s is revised downward). Alternatively, the projected P/E ratio for the current fiscal year for Nikkei 225 constituent stocks must reach approximately 17.6. Or, the Nikkei 225 must reach approximately 65,500 yen.

Consequently, over the medium to long term, the Japanese market is overvalued by about 1,350 yen.

From a fundamental perspective, one could also say that the Japanese market is about 1,350 yen less attractive than the U.S. market. Last week, the Japanese market shifted to being undervalued.

 

[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 +2.9%) 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 the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was negative. The daily is a above the 200-day line and within the clouds on the Ichimoku Chart. This week, the focus will be on whether the NYDow can keep above the 25-day line.

②    Following the release of earnings results, the projected ROE for Nikkei 225 constituent stocks stood at +10.6%. This represents an improvement of +1.7 percentage points compared to three months ago. The profit growth rate was +11.9%, marking an improvement of +13.2 percentage points compared to three months ago.

③    Long-term U.S. interest rates fell, and the interest rate differential between Japan and the U.S. widened from 1.84 to 1.87. The dollar-yen exchange rate moved in the direction of yen weakness, trading in the 161-yen to 162-yen range. The Dollar Index fell 0.21% for the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2026 is expected to be +2.9% for Japan and +5.8% for the U.S., so the Japanese market is 2.9 percentage points inferior in this aspect.

⑤    Net buying was recorded in the second week of July. It is highly likely that net selling occurred in the third week of July, and net selling is expected this week. Last week, out of the five points, point ① was a bearish factor.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 7.7 percentage points (equivalent to approximately 4,940 yen for the Nikkei 225) relative to the NASDAQ based on the 200-day moving average deviation. Meanwhile, it is overvalued by 7.6 percentage points (equivalent to approximately 4,870 yen for the Nikkei 225) relative to the NY Dow based on the 200-day moving average deviation.

 

The Japanese market is performing better than the Dow Jones and NASDAQ. The VIX, an indicator of volatility in the U.S. market, rose to 18.8 for the week. The Nikkei VI fell to 36.4 for the week. The U.S. market is in a state of “fear,” while the Japanese market is in a state of “extreme fear.”

The Nikkei Average is below the 9-day and 25-day moving averages. A “red light” is lit for the short-term trend.

The Nikkei Average is within the cloud in the Ichimoku Kinko Hyo chart. The overall deviation rate is +7.9%, and the deviation rate from the 200-day moving average is +14.3%. With two factors positive, a “yellow light” is lit for the medium-term trend.

 

In the US market, the NY Dow is below the 9-day line and above 25-day and 200-day lines. It is above the clouds of the Ichimoku chart.

The NASDAQ is below the 9-day line and 25-day and above 200-day lines. It is within the clouds the Ichimoku Chart.

The U.S. market is showing a “yellow light” in the short term and a “yellow light” in the medium term.

 

[Outlook for this week]

In the U.S. market, concerns about an economic downturn driven by rising long-term interest rates—a result of the prolonged conflict in the Middle East—and high oil prices are likely to be the primary focus for the time being.

 

Looking at the technical aspects, the U.S. market is in a medium-term no trend and a short-term no trend. The Japanese market is in a medium-term no 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 161 and 163 yen per dollar range.

 

This week, U.S. markets will likely continue to closely monitor developments in the Middle East. Additionally, AI-related stocks are likely to face further challenges ahead of a series of earnings reports from hyperscalers, semiconductor manufacturers, and infrastructure providers. In terms of economic indicators, attention will focus on the Leading Economic Index and the results of the Federal Reserve’s regional surveys. Globally, the ECB is scheduled to announce its policy interest rate, while the UK is set to release its inflation rate, unemployment rate, and retail sales figures, and Japan is scheduled to announce its trade balance and Consumer Price Index (CPI).

 

Last week, the Nikkei Average fell well below the expected range. The high was about 1,900 yen below the upper limit, and the low was about 4,660 yen below the lower limit.

This week, the Nikkei Average is expected to move within a range defined by the upper limit at the -1σ Bollinger Band (currently around 67,360 yen) and the lower limit at the -3σ Bollinger Band (currently 63,830 yen).

                           

The Nikkei Average is likely to see selling pressure this week due to uncertainty surrounding the situation in the Middle East and concerns about excessive investment in AI and semiconductor-related stocks.