Outlook for the Nikkei average this week [17 May 2026]

 [Fundamental viewpoint]

In the U.S. markets last week, buying of stocks with strong first-quarter earnings results clashed with concerns that stocks were overvalued due to rising long-term interest rates, resulting in mixed weekly performance for the major stock indices.

Weekly percentage change: Dow Jones: -0.17%, NASDAQ: -0.08%, S&P 500: +0.13%

                                                                                                 

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 1.14 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 22.2 and the Nikkei 225's P/E ratio of 19.0 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 1.14 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 24.2 Or, the Nikkei 225 will be around 78,340 yen.

As a result, the Japanese market is undervalued by about 16,930 yen in the medium to long term.

From a fundamental perspective, one could say that the Japanese market is about 16,930 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 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 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 +9.8%. This represents an improvement of +0.7 percentage points compared to three months ago. The profit growth rate was +3.9%, marking an improvement of +4.6 percentage points compared to three months ago.

③    Long-term U.S. interest rates rose, while the interest rate differential between Japan and the U.S. remained unchanged at 1.89. The dollar-yen exchange rate moved toward a weaker yen, fluctuating between the 156 and 158 yen ranges. The Dollar Index rose 1.46% 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 first week of May. It is highly likely that net selling occurred in the second week of May, and net selling is expected this week. Last week, of the five factors, factor ② was a bullish factor, while factor ① was a bearish factor..

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 7.5 percentage points (equivalent to approximately ¥4,610 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 17.2 percentage points (equivalent to approximately ¥10,620 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, rose to 18.4 for the week. The Nikkei VI fell to 29.7 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 below the 9-day and above 25-day moving averages. A “yellow 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 +33.8%, and the deviation rate from the 200-day moving average is +21.5%. With 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 above 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 ‘yellow 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 157 and 160 yen per dollar range.

 

This week, NVIDIA’s earnings report will be the biggest test for U.S. markets. Geopolitical tensions in the Middle East will also remain a focus. On the economic front, in addition to the minutes from the previous FOMC meeting and housing price data, PMI figures, regional Fed indices, and the University of Michigan Consumer Sentiment Index will be released. Globally, data releases are scheduled to include the Eurozone PMI, UK inflation, unemployment, and retail sales figures; China’s industrial production, retail sales, unemployment, housing prices, and fixed-asset investment; and Japan’s first-quarter GDP.

 

Last week, the Nikkei 225 fell below the projected range. The high was about 480 yen lower than the upper limit, and the low was about 1,000 yen lower than the lower limit.

This week, the Nikkei 225 is expected to move within a range bounded by the upper limit at the +1σ Bollinger Band (currently around 61,940 yen) and the lower limit at the -1σ Bollinger Band (currently 57,020 yen).      

This week, the Nikkei Average is likely to be driven by trends in long-term interest rates in Japan and the U.S. If interest rates rise further, the upward trend will likely have to pause.