Outlook for the Nikkei average this week [25 October 2026]

 [Fundamental viewpoint]

In the U.S. markets last week, while selling pressure continued in some semiconductor and AI infrastructure stocks, investors continued to shift funds into defensive and cyclical stocks, resulting in mixed weekly performance for the major stock indices.

Weekly percentage change: Dow Jones: +0.41%, NASDAQ: -0.71%, S&P 500: -0.47%

 

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 undervalued by 0.07 points. This undervaluation stems from the difference between the S&P 500’s P/E ratio of 19.2 and the projected P/E ratio of 16.7 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 narrow by 0.07 percentage points relative to the OECD forecast (either Japan’s forecast must be revised upward or the U.S.’s must be revised downward). Alternatively, the projected P/E ratio for the current fiscal year for Nikkei 225 constituent stocks must reach approximately 16.9. Or, the Nikkei 225 must reach approximately 63,410 yen.

Consequently, the Japanese market is undervalued by about 720 yen in the medium to long term.

From a fundamental perspective, one could say that the Japanese market is slightly less attractive than the U.S. market. Last week, the Japanese market was performing slightly weaker than the U.S. market.

 

[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 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 keep 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 +17.1%, marking an improvement of +4.7 percentage points compared to three months ago.

③    Long-term U.S. interest rates fell, narrowing the interest rate differential between Japan and the U.S. from 2.24 to 2.15. As a result, the dollar-yen exchange rate moved from the 158-yen range to the 157-yen range, reflecting a strengthening of the yen. The Dollar Index fell 0.44% 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.

Net selling occurred in the second week of October. It is highly likely that net selling also occurred in the third week of October, and net selling is expected this week. Last week, out of the five factors, points ① and ③ were bearish.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is undervalued by 1.7 percentage points (equivalent to about 1,070 yen for the Nikkei 225) relative to the NASDAQ based on the 200-day moving average deviation. Meanwhile, it is undervalued by 1.3 percentage points (equivalent to about 820 yen for the Nikkei 225) relative to the NY Dow based on the 200-day moving average deviation.

 

The Japanese market is in a slightly weaker state than the Dow Jones Industrial Average and the NASDAQ. The VIX, an indicator of volatility in the U.S. market, fell to 19.4 for the week. The Nikkei VI rose to 38.3 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 225 is trading below both its 9-day and 25-day moving averages. A “red light” is flashing for the short-term trend.

The Nikkei 225 is trading below the “Cloud” in the Ichimoku Kinko Hyo chart. The overall deviation rate stands at -8.6%, while the deviation from the 200-day moving average is +2.0%. Since both factors are negative, a “yellow light” is flashing 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 under 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 “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 down 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 155-yen level to the 157-yen level.

 

In the U.S. market this week, investors will be monitoring the situation in the Middle East to see whether it might lead to further disruptions in oil supplies. Major technology companies—including Microsoft, Alphabet, and Amazon—are also set to report their earnings. Monetary policy will be another key focus, with the Federal Reserve, the European Central Bank, and the Bank of Japan all scheduled to make decisions on their respective policy interest rates. On the economic data front, the preliminary GDP figures for the July–September quarter and the September PCE deflator are due for release. Globally, the Eurozone’s preliminary GDP, inflation data from major European economies (such as Germany), and inflation figures for Japan are also expected to be announced.

 

Last week, the Nikkei Stock Average moved largely within the anticipated range; it fell short of the upper bound by approximately 950 points and the lower bound by about 140 points.

For this week, the Nikkei is expected to fluctuate between the 25-day moving average (currently around 66,280 yen) as the upper limit and the -2σ Bollinger Band (currently 61,660 yen) as the lower limit.

 

While a short-term rebound is possible, there is also a scenario in which the index remains weak—particularly if unauthorized access incidents targeting financial institutions and other companies continue to spread.