[Fundamental viewpoint]
In the U.S. markets last week, long-term interest rates rose due to higher crude oil prices amid uncertainty surrounding the situation in Iran. However, as the weekend approached, the employment report came in below market expectations, dampening expectations of an early rate hike, and stock indices posted mixed results for the week.
Weekly percentage change: Dow Jones: -1.26%, NASDAQ: +0.45%, S&P 500: -0.27%
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 0.01 percentage points. This overvaluation stems from the difference between the S&P 500’s P/E ratio of 19.8 and the projected P/E ratio of 17.4 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 condition 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 0.01 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 68,310 yen.
Consequently, the Japanese market is overvalued by about 100 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 and U.S. markets were roughly in balance...
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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 negative 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 +10.9%. This represents an improvement of +0.4 percentage points compared to three months ago. The profit growth rate was +17.4%, marking an improvement of +5.8 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 2.11 to 2.19. The dollar-yen exchange rate moved in the direction of yen weakness, ranging from the 156-yen level to the 158-yen level. The Dollar Index rose 0.88% 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 sell position in the fourth week of September and a net buy position in the fifth week of September, and a net buy position is expected this week. Last week, out of the five factors, ① and ③ were bullish..
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 3.6 percentage points (equivalent to approximately 2,460 yen for the Nikkei 225) relative to the NASDAQ based on the 200-day moving average deviation. Meanwhile, it is overvalued by 11.6 percentage points (equivalent to approximately 7,920 yen for the Nikkei 225) relative to the Dow Jones Industrial Average 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, rose to 15.3 for the week. The Nikkei VI rose to 22.6 for the week. The U.S. market is in a state of “optimism,” while the Japanese market is in a state of “slight fear.”
The Nikkei 225 is trading above both the 9-day and 25-day moving averages. The short-term trend is showing a “green light.”
The Nikkei 225 is trading above the Ichimoku Cloud. The overall deviation rate stands at +19.8%, while the deviation from the 200-day moving average is +13.3%. With all three factors indicating a positive outlook, the medium-term trend is showing a “green light.”
In the US market, the NY Dow is below the 9-day line and 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 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 up 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 157-yen level to the 159-yen level.
In the U.S. markets this week, attention will continue to focus on the developments in the U.S.-Iran standoff. On the economic front, the FOMC minutes, the ISM Services PMI, and the University of Michigan Consumer Sentiment Index are scheduled for release. Globally, Germany’s manufacturing orders and trade statistics, the Eurozone’s Producer Price Index (PPI), Japan’s Consumer Confidence Index, and machine tool orders are scheduled for release. In addition, developments surrounding the OPEC meeting and the Brazilian presidential election are likely to remain key events for global markets..
Last week, the Nikkei 225 fluctuated both above and below the expected range. It rose about 1,140 yen above the upper limit and fell about 570 yen below the lower limit.
This week, the Nikkei 225 is expected to move within a range defined by the upper limit at the +3σ Bollinger Band (currently around 69,530 yen) and the lower limit at the +1σ Bollinger Band (currently 66,870 yen).
Depending on developments in Iran, the Nikkei 225 is likely to trade along the rising +2σ Bollinger Band this week.
