[Fundamental viewpoint]
Last week, U.S. stock indices rose on the back of optimism that negotiations between the U.S. and Iran were making progress thanks to Pakistan’s mediation.
Weekly percentage change: Dow Jones: +2.13%, NASDAQ: +0.45%, S&P 500: +0.88%
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.
The difference in the yield spread between the Japanese and U.S. markets is 1.21 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 21.8 and the Nikkei 225's P/E ratio of 18.3 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 1.21 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 23.5 Or, the Nikkei 225 will be around 81,340 yen.
As a result, the Japanese market is undervalued by about 18,000 yen in the medium to long term.
From a fundamental perspective, one could say that the Japanese market is about 18,000 yen less attractive than the U.S. market. Last week, the weakness in the Japanese market intensified.
[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 positive last week. The daily is above the 200-day line and the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was positive. The daily is a above the 200-day line and 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 +10.4%. This represents an improvement of +1.4 percentage points compared to three months ago. The profit growth rate was +6.5%, marking an improvement of +5.6 percentage points compared to three months ago.
③ Although U.S. long-term interest rates fell and the interest rate differential between Japan and the U.S. narrowed from 1.89 to 1.82, the dollar-yen exchange rate moved toward a weaker yen, fluctuating between the 158 and 159 yen ranges. The Dollar Index rose 0.05% 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 +4.7% for the U.S., so the Japanese market is 1.7 percentage points inferior in this aspect.
⑤ Net buying was recorded in the second week of May, and it is highly likely that net buying also occurred in the third week of May; net buying is expected this week. Last week, points ① and ② were bullish factors out of the five points.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 10.1 percentage points (equivalent to approximately ¥6,400 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 17.9 percentage points (equivalent to approximately ¥11,340 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 performing better than the Dow Jones and NASDAQ. The VIX, an indicator of volatility in the U.S. market, fell to 16.7 for the week. The Nikkei VI fell to 28.4 for the week. The U.S. market is in an “optimistic” state, while the Japanese market is in a “fearful” state.
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 +40.0%, and the deviation rate from the 200-day moving average is +24.0%. With three factors positive, a “green light” is lit for the medium-term trend.
In the US market, the NY Dow is above the 9-day line and 25-day and 200-day lines. It is above the clouds of the Ichimoku chart.
The NASDAQ is the above 9-day line and 25-day and 200-day lines. It is above the clouds the Ichimoku Chart.
It is a ‘green light’ in the short term and a ‘green 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 up trend and a short-term no trend. The Japanese market is in a medium-term up trend, and the short-term is no 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 158 and 160 yen per dollar range.
In the U.S. markets this week, news regarding the war in the Middle East and trends in crude oil prices will remain key focal points. Strong earnings reports from major corporations, combined with inflationary pressures stemming from the war, have driven gains in both the stock market and Treasury yields. On the economic front, the release of the Income and Spending Report—which includes the PCE inflation index—is expected to draw significant attention. Globally, attention will focus on the release of inflation data from the Eurozone, as well as Japan’s industrial production, retail sales, consumer confidence index, and unemployment rate.
Last week, the Nikkei 225 closed above the projected range. The high was about 1,200 yen higher than the upper limit, and the low was about 1,040 yen higher than the lower limit.
This week, the Nikkei 225 is expected to trade within a range defined by the upper limit at the +2σ Bollinger Band (currently around 63,910 yen) and the lower limit at the 25-day moving average (currently 60,570 yen).
This week, the Nikkei Average is likely to face a critical juncture as the conflict between the U.S. and Iran nears a potential conclusion or resumption. With oil prices and long-term interest rates also in focus, the market is expected to remain highly volatile.
