[Fundamental viewpoint]
Last week in the U.S. markets, stock indices showed mixed results for the week as earnings reports from companies announcing quarterly results yielded mixed results and speculation swirled around the next Federal Reserve chair.
Weekly Change: NY Dow: -0.42%, NASDAQ: -0.17%, S&P 500: +0.34%.
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 Latin America and East Asia, the Middle East
continue to require attention..
The difference in the yield spread between the Japanese and U.S. markets is 1.00 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 22.9 and the Nikkei 225's P/E ratio of 19.8 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 1.00 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 24.6 Or, the Nikkei 225 will be around 66,390 yen.
As a result, the Japanese market is undervalued by about 13,060 yen in the medium to long term.
From a fundamental perspective, the Japanese market is about 13,060 yen less attractive than the U.S. market. Last week, the weakness in the Japanese market expanded.
[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 above the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was negative. The daily is above the 200-day line and the clouds on the Ichimoku Chart. This week, the focus will be on whether the NY Dow can return above the 25-day line.
② Following the earnings announcements, the projected ROE for Nikkei 225 constituents stands at +8.8%. This is unchanged from three months ago. The profit growth rate is -3.2%, an improvement of +3.3 percentage points compared to three months ago.
③ U.S. long-term interest rates rose, widening the interest rate differential between Japan and the U.S. from 1.99 to 2.00. The dollar-yen exchange rate moved slightly toward yen depreciation, fluctuating between the 152 and 155 yen range. The dollar index fell by -0.32% over the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2026 is expected to be +3.2% for Japan and +4.9% for the U.S., so the Japanese market is 1.7 percentage points inferior in this aspect.
⑤ The third week of January likely saw net buying, while the fourth week likely saw net selling. This week is expected to see net selling. Last week, points ① and ③ were bearish factors out of the five points.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 12.7 percentage points (equivalent to approximately ¥6,770 for the Nikkei 225) relative to the NASDAQ's 200-day moving average deviation rate on a medium-to-long-term basis. Meanwhile, it is overvalued by 13.6 percentage points (equivalent to approximately ¥7,250 for the Nikkei 225) relative to the NY Dow's 200-day moving average deviation rate on a medium-to-long-term basis.
The Japanese market is stronger than the NY Dow and NASDAQ. The VIX, an indicator of volatility in the U.S. market, rose to 17.4 on a weekly basis. The Nikkei VI rose to 34.7 on a weekly basis. The U.S. market is in a “slightly optimistic” state, while the Japanese market is in a “fear of heights” state.
The Nikkei Average is above both the 9-day and 25-day moving averages. A “green light” is lit for the short-term trend.
The Nikkei Average is above the cloud in the Ichimoku Kinko Hyo chart. The overall deviation rate is +21.1%, and the deviation rate from the 200-day moving average is +21.1%. With all three factors positive, a “green light” is lit 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 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 above the clouds the Ichimoku Chart.
It is a ‘red light’ in the short term and a ‘green light’ in the medium term.
[Outlook for this week]
In the U.S. market, key immediate concerns are expected to include the frequency of interest rate cuts by the Federal Reserve this year, the Supreme Court's ruling on the constitutionality of Trump tariffs, and the market impact of advancing protectionist policies.
Looking at the technical aspects, the U.S. market is in a medium-term up trend and a short-term down trend. The Japanese market is in a medium-term up trend, and the short-term is up 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 153 and 157 yen per dollar range.
This week in the U.S. markets, key concerns include the impact of President Trump's nomination of Kevin Warsh as the next Federal Reserve Chair, unprecedented volatility in precious metal prices, and the effects of dollar weakness. Economic indicators scheduled for release include the Employment Report, JOLTS (Job Openings and Labor Turnover Survey), ADP Employment Report, ISM Manufacturing PMI, and the University of Michigan Consumer Sentiment Index. Earnings reports from Alphabet, Amazon, AMD, Palantir, and Qualcomm are expected to provide updates on investors' views regarding AI-related businesses. Globally, the ECB, BOE, and RBA will announce policy interest rates, while the eurozone inflation rate and China's PMI will be closely watched.
Last week, the Nikkei Average traded within its expected range. The upper limit fell below 1,360 yen, while the lower limit rose above 470 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 55,130 yen) and the lower limit at the 25-day moving average (currently 52,450 yen).
This week, the Nikkei average is likely to be significantly influenced by movements in the dollar-yen exchange rate and precious metal prices.
