[Fundamental viewpoint]
In the U.S. markets last week, crude oil futures fell on expectations that the situation in Iran was improving, and stock indices ended the week mixed.
Weekly percentage change: Dow Jones: +0.28%, NASDAQ: +2.06%, S&P 500: +1.21%
On the other hand, medium- to long-term
risks include concerns over military conflicts in the Middle East and the
protracted conflict in Ukraine; financial instability caused by inflation and
rising interest rates driven by high crude oil prices, along with concerns
about a global economic slowdown; and concerns over a real estate bubble burst
and an economic slowdown in China. Furthermore, these factors have raised
concerns about the onset of stagflation. In addition, continued vigilance is
required regarding geopolitical risks in Latin America and East Asia..
Considering the OECD’s nominal GDP forecasts for 2026, the yield spread between the Japanese and U.S. markets indicates that the Japanese market is overvalued by 0.04 points. This overvaluation stems from the difference between the S&P 500’s P/E ratio of 19.9 and the projected P/E ratio of 17.3 for the constituent stocks of 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. in 2026 must widen by 0.04 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 17.2. Or, the Nikkei 225 must reach approximately 65,920 yen.
Consequently, the Japanese market is overvalued by about 440 yen in the medium to long term.
From a fundamental perspective, the Japanese market could be considered slightly more attractive than the U.S. market. Last week, the Japanese market shifted into overvalued territory..
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[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 positive last week. The daily is above the 200-day line and under 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 return above the 25-day line.
② Following the release of earnings results, the projected ROE for Nikkei 225 constituent stocks stood at +11.0%. This represents an improvement of +0.3 percentage points compared to three months ago. The profit growth rate was +17.9%, marking an improvement of +8.4 percentage points compared to three months ago.
③ Although U.S. long-term interest rates rose and the interest rate differential between Japan and the U.S. widened from 2.05 to 2.11, the dollar-yen exchange rate moved in the direction of yen weakness, ranging from the 156-yen level to the 159-yen level. The Dollar Index rose 0.82% 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 It is highly likely that there was a net buying position in the third and fourth weeks of September, and a net buying position is expected this week. Last week, out of the five points, points ① and ③ were bullish factors.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 1.2 percentage points (equivalent to about 800 yen for the Nikkei 225) relative to the NASDAQ based on the 200-day moving average deviation ratio over the medium to long term. Meanwhile, the Japanese market is overvalued by 7.7 percentage points (equivalent to about 5,110 yen for the Nikkei 225) relative to the NY Dow based on the 200-day moving average deviation ratio over the medium to long term.
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 14.9 for the week. The Nikkei VI fell to 20.3 for the week. The U.S. market is in an “optimistic” state, while the Japanese market is in a “slightly fearful” state.
The Nikkei 225 is trading above both its 9-day and 25-day moving averages. A “green light” is flashing for the short-term trend.
The Nikkei 225 is trading within the “Cloud” in the Ichimoku Kinko Hyo chart. The overall deviation rate stands at +12.1%, while the deviation rate from the 200-day moving average is +10.8%. Since both factors are positive, a “yellow light” is flashing for the medium-term trend.
In the US market, the NY Dow is above the 9-day line and below 25-day and above 200-day lines. It is under the clouds of the Ichimoku chart.
The NASDAQ is above the 9-day line and above 25-day and 200-day lines. It is above the clouds the Ichimoku Chart.
The U.S. market is showing a “yellow 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 no trend. The Japanese market is in a medium-term no trend, and the short-term is up trend.
An analysis of the foreign exchange market shows that the yen has begun to strengthen, peaking at 163 yen in July 2026. This week, the exchange rate is expected to range from the 158-yen level to the 155-yen level.
In the U.S. markets this week, attention will be focused on the outcome of the diplomatic agreement between the U.S., Iran, and the GCC countries. On the economic front, the spotlight will be on the September employment report and the JOLTS job openings data. In addition, the ISM PMI and the PCE price index will be released. Globally, data on the eurozone’s inflation and unemployment rates, China’s PMI, Japan’s industrial production and retail sales, and the Bank of Japan’s “Tankan” survey will be released..
Last week, the Nikkei 225 closed above the projected range. The high was about 180 yen higher than the upper limit of the range, and the low was about 1,110 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 67,180 yen) and the lower limit at the 25-day moving average (currently 65,270 yen)..
This week, the Nikkei Average is likely to serve as a litmus test heading into year-end, as investors watch to see if it can break out of its weekly triangle consolidation pattern.
