Outlook for the Nikkei average this week [26 July 2026]

 [Fundamental viewpoint]

Last week on the U.S. markets, stock indices closed lower for the week as AI and semiconductor-related stocks continued to decline and crude oil prices rose amid uncertainty surrounding the situation in Iran.

Weekly percentage change: NY Dow : -0.38%, NASDAQ: -2.13%, S&P 500: -0.61%

                                       

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.

Considering the OECD’s nominal GDP forecasts for 2026, the Japanese market is overvalued by 0.08 points relative to the U.S. market. This overvaluation stems from the difference between the S&P 500’s P/E ratio of 21.1 and the projected P/E ratio of 17.7 for companies included in 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 conditions must be met:

Compared to the current Nikkei 225 price, the difference in GDP growth rates between Japan and the U.S. for 2026 must narrow by an additional 0.08 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 17.4. Or, the Nikkei 225 must reach approximately 63,680 yen.

Consequently, the Japanese market is overvalued by about 930 yen in the medium to long term.

From a fundamental perspective, the Japanese market could be considered more attractive than the U.S. market. Last week, the Japanese market shifted into overvalued territory.

 

[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 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 within the clouds on the Ichimoku Chart. This week, the focus will be on whether the NYDow can return above the 25-day line.

②    Following the release of earnings results, the projected ROE for Nikkei 225 constituent stocks stood at +10.5%. This represents an improvement of +1.7 percentage points compared to three months ago. The profit growth rate was +12.2%, marking an improvement of +13.7 percentage points compared to three months ago.

③    Long-term U.S. interest rates rose, widening the interest rate differential between Japan and the U.S. from 1.87 to 1.90. The dollar-yen exchange rate moved in a direction of yen weakness, trading in the 162-yen to 163-yen range. The Dollar Index rose 0.71% 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 selling occurred in the third week of July. It is highly likely that net selling also occurred in the fourth week of July, and net selling is expected this week. Last week, out of the five points, point ① was a bearish factor.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 10.2 percentage points (equivalent to approximately 6,590 yen for the Nikkei 225) relative to the NASDAQ based on the 200-day moving average deviation. Meanwhile, it is overvalued by 8.3 percentage points (equivalent to approximately 5,360 yen for the Nikkei 225) relative to the NY Dow 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, fell to 18.6 for the week. The Nikkei VI fell to 32.9 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 Average is below the 9-day and 25-day moving averages. A “red light” is lit for the short-term trend.

The Nikkei Average is within the cloud of the Ichimoku Kinko Hyo chart. The overall deviation rate is +9.1%, and the deviation rate from the 200-day moving average is +14.3%. With two factors positive, a “yellow 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 within the clouds the Ichimoku Chart.

The U.S. market is showing a “red 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 down trend. The Japanese market is in a medium-term no trend, and the short-term is down 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 163 and 164 yen per dollar range.

 

This week, U.S. markets will likely continue to closely monitor developments in the Middle East. Meanwhile, the Federal Reserve is scheduled to announce its policy decision for July. In addition, earnings reports from major companies such as Apple, Microsoft, Amazon, Meta, and Samsung are expected to influence stock prices. In terms of economic indicators, attention will focus on durable goods orders, the Conference Board’s Consumer Confidence Index, preliminary GDP figures for the April–June quarter, and the PCE deflator. Globally, the United Kingdom and Japan will announce their policy interest rates, and the eurozone will release GDP and inflation data, while China will publish its PMI figures.

 

Last week, the Nikkei Average traded above the expected range. The upper limit was exceeded by about 650 yen, and the lower limit by about 760 yen.

This week, the Nikkei Average is expected to trade within a range defined by the upper limit at the -1σ Bollinger Band (currently around 66,400 yen) and the lower limit at the -3σ Bollinger Band (currently 62,230 yen).

 

This week, the Nikkei 225 is likely to see selling pressure prevail, driven by uncertainty surrounding the situation in the Middle East and concerns about excessive investment in AI and semiconductor-related stocks.