[Fundamental viewpoint]
Last week in the U.S. markets, stock indices declined over the week amid concerns about the profitability of AI investments and uncertainty over AI replacing existing businesses.
Weekly Change Rate: NY Dow: -1.31%, NASDAQ: -0.95%, S&P 500: -0.44%.
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 0.42 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 21.9 and the Nikkei 225's P/E ratio of 20.7 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 0.42 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 22.6 Or, the Nikkei 225 will be around 64,400 yen.
As a result, the Japanese market is undervalued by about 5,550 yen in the medium to long term.
Fundamentally speaking, the Japanese market is about ¥5,550 less attractive than the U.S. 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 above the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was negative. The daily is above the 200-day line and below 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 reached +9.0%. This represents a 0.1 percentage point improvement compared to three months ago. The profit growth rate stood at +0.9%, marking a 3.7 percentage point improvement compared to three months ago.
③ U.S. long-term interest rates declined, narrowing the interest rate differential between Japan and the U.S. from 1.98 to 1.84. However, the dollar-yen exchange rate moved in a weakening direction for the yen, fluctuating within the range of 153 to 156 yen per dollar. The dollar index fell by -0.15% for 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 and fourth weeks of February likely saw net buying, while net selling is expected this week. Last week, points ③ and ⑤ were the bullish factors among the five points.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 25.4 percentage points (equivalent to approximately ¥14,950 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 22.2 percentage points (equivalent to approximately ¥13,060 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 outperforming the NY Dow and NASDAQ. The VIX, an indicator of volatility in the U.S. market, rose to 19.9 on a weekly basis. The Nikkei VI also rose to 27.3 on a weekly basis. The U.S. market is in a state of “mood of distrust,” and the Japanese market is also in a state of “mood of distrust.”
The Nikkei Average is above 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 +46.1%, and the deviation rate from the 200-day moving average is +28.0%. 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 below the clouds the Ichimoku Chart.
It is a ‘red light’ in the short term and a ‘yellow light’ in the medium term.
[Outlook for this week]
In the U.S. market, key immediate concerns include the impact of U.S.-Israel attacks on Iran, the AI agent shock, the frequency of Fed rate cuts this year, the Supreme Court's ruling on the unconstitutionality of Trump tariffs, and the advancement of Donlowism.
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 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 156 and 153 yen per dollar range.
This week in U.S. markets, the impact of potential U.S.-Israel military action against Iran on equity markets will be a key concern. Additionally, February's employment report will be released after a series of strong labor indicators dampened expectations for the next Fed rate cut. The ISM Purchasing Managers' Index (PMI) and retail sales figures will also be closely watched indicators. Globally, China's PMI, eurozone inflation and unemployment rates, and the minutes from the ECB's previous meeting will be closely watched.
Last week, the Nikkei Average traded within its expected range. The upper limit fell short by 40 yen, while the lower limit exceeded 1,790 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 59,690 yen) and the lower limit at the 25-day moving average (currently 55,620 yen).
This week, the Nikkei Average faces heightened downside risks, including geopolitical tensions in the Middle East and growing skepticism over excessive investment in AI-related companies.
