Outlook for the Nikkei average this week [18 October 2026]

 [Fundamental viewpoint]

In the U.S. markets last week, while selling pressure continued in some semiconductor and AI infrastructure stocks, a rotation toward other stocks perceived as undervalued gained momentum, resulting in mixed weekly performance for the major stock indices.

 

Weekly percentage change: Dow Jones: +0.67%, NASDAQ: -4.48%, S&P 500: -1.95%

 

On the other hand, medium- to long-term risks include concerns over military conflicts in the Middle East and the protracted conflict in Ukraine; financial instability caused by inflation and rising interest rates driven by high crude oil prices, along with concerns about a global economic slowdown; and concerns over a real estate bubble burst and an economic slowdown in China. Furthermore, these factors have raised concerns about the onset of stagflation. In addition, continued vigilance is required regarding geopolitical risks in Latin America and East Asia..

Considering the OECD’s nominal GDP forecasts for 2026, the yield spread between the Japanese and U.S. markets indicates that the Japanese market is overvalued by 0.07 percentage points. This overvaluation stems from the difference between the S&P 500’s P/E ratio of 19.3 and the projected P/E ratio of 17.0 for the constituent stocks of the Nikkei 225 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 condition 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 0.07 percentage points relative to the OECD forecast (either Japan’s forecast must be revised downward or the U.S.’s must be revised upward). Alternatively, the projected P/E ratio for the current fiscal year for Nikkei 225 constituent stocks must reach approximately 16.8. Or, the Nikkei 225 must reach approximately 65,320 yen.

Consequently, the Japanese market is overvalued by about 780 yen in the medium to long term.

From a fundamental perspective, the Japanese market could be considered slightly more attractive than the U.S. market. Last week, the Japanese market was performing slightly better than the U.S. market..

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 [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 positive last week. The daily is above the 200-day line and under 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 +10.9%. This represents an improvement of +0.4 percentage points compared to three months ago. The profit growth rate was +17.2%, marking an improvement of +5.2 percentage points compared to three months ago.

③    Long-term U.S. interest rates fell, narrowing the interest rate differential between Japan and the U.S. from 2.24 to 2.15. As a result, the dollar-yen exchange rate moved from the 158-yen range to the 157-yen range, reflecting a strengthening of the yen. The Dollar Index fell 0.44% 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 first week of October. It is highly likely that net selling occurred in the second week of October, and net selling is expected this week. Last week, out of the five factors, ① and ③ were bearish.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 2.2 percentage points (equivalent to approximately 1,440 yen for the Nikkei 225) relative to the NASDAQ based on the 200-day moving average deviation. Meanwhile, it is overvalued by 3.9 percentage points (equivalent to approximately 2,550 yen for the Nikkei 225) relative to the Dow Jones Industrial Average 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 20.0 for the week. The Nikkei VI rose to 32.2 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 225 is trading below both the 9-day and 25-day moving averages. The short-term trend is showing a “red light.”

The Nikkei 225 is trading below the Ichimoku Cloud. The overall deviation rate stands at +3.4%, while the deviation from the 200-day moving average is +6.9%. With all two factors indicating a positive outlook, the medium-term trend is showing a “yellow light.”

 

In the US market, the NY Dow is above the 9-day line and 25-day and 200-day lines. It is under 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 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.

 

An analysis of the foreign exchange market shows that the yen has begun to strengthen, peaking at 163 yen in July 2026. This week, the exchange rate is expected to range from the 156-yen level to the 158-yen level.

 

In the U.S. markets this week, attention will continue to focus on the developments in the U.S.-Iran standoff. In addition, earnings reports from companies such as Meta, Tesla, P&G, Netflix, GE Aerospace, and SAP are likely to influence the market. On the economic front, housing-related indicators and PMI data will be released. Globally, the Eurozone PMI, Germany’s economic sentiment index, China’s third-quarter GDP growth rate, and Japan’s inflation rate and trade statistics are scheduled to be released.

 

Last week, the Nikkei 225 closed below the expected range. The high was about 2,020 yen below the upper limit, and the low was about 2,390 yen below the lower limit.

This week, the Nikkei 225 is expected to trade within a range defined by the 25-day moving average (currently around 66,440 yen) on the upside and the -2σ Bollinger Band (currently 62,080 yen) on the downside.

 

If concerns about the profitability of AI infrastructure investments persist in the U.S. markets, the Nikkei 225 is likely to trade weakly this week.