[Fundamental viewpoint]
In the U.S. market last week, growing uncertainty regarding the monetization and sustainability of AI investments led to a decline in stock indices.
Weekly performance: Dow Jones -0.85%, NASDAQ -2.00%, S&P 500 -0.57%
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 0.16 points. This undervaluation stems from the difference between the S&P 500’s P/E ratio of 19.3 and the projected P/E ratio of 16.4 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 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 0.16 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 65,000 yen.
Consequently, the Japanese market is undervalued by about 1,710 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 chart for the NY Dow closed with a bearish candle last week. On the daily chart, the index remains above the 200-day moving average but below the "cloud" of the Ichimoku Kinko Hyo indicator. The weekly chart for the NASDAQ also closed with a bearish candle; on its daily chart, the index is likewise positioned above the 200-day moving average but below the Ichimoku cloud. This week, the focus will be on whether the Dow can climb back above its 25-day moving average.
② Following the release of earnings results, the projected ROE for Nikkei 225 constituent stocks stood at +11.0%. This represents an improvement of +0.4 percentage points compared to three months ago. The profit growth rate was +17.8%, marking an improvement of +5.1 percentage points compared to three months ago.
③ Although U.S. long-term interest rates declined and the interest rate differential between the U.S. and Japan narrowed from 2.21 to 2.17, the USD/JPY pair moved toward a weaker yen, shifting from the 156 yen range to the 158 yen range. The U.S. Dollar Index rose by 0.21% over 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 There was a net buying position for the third week of October. It is highly likely that the fourth week of October also saw net buying, while a net selling position is expected for this week. Last week, points ① and ③—out of the five—served as bullish factors.
[Technical viewpoint]
From a technical perspective, the Japanese market appears overvalued in the medium to long term: by 1.1 percentage points (equivalent to approximately 700 yen on the Nikkei Stock Average) when compared to the NASDAQ based on the divergence from the 200-day moving average, and by 0.2 percentage points (equivalent to approximately 130 yen on the Nikkei Stock Average) when compared to the Dow Jones Industrial Average on the same basis.
The Japanese market is currently showing slightly more weakness than the Dow Jones Industrial Average and the NASDAQ. The VIX—an indicator of volatility in the U.S. market—remained flat for the week at 19.4, while the Nikkei VI declined to 33.8. The U.S. market is in a state of "fear," whereas 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 -5.6%, while the deviation from the 200-day moving average is +2.4%. Since both factors are negative, a “yellow light” is flashing 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 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 under 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.
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 156-yen level to the 158-yen level.
In the U.S. market this week, attention will be focused on the midterm elections. Geopolitical developments concerning the Middle East and Ukraine will also remain a key area of interest. Major companies, including Apple, Palantir, AMD, McDonald’s, Qualcomm, and Uber, are scheduled to report their earnings. Among economic indicators, the employment report will be the primary focus; other releases will include the ISM manufacturing and non-manufacturing PMIs, JOLTS job openings, factory orders, trade statistics, and the preliminary University of Michigan Consumer Sentiment Index. On a global level, China’s PMIs and inflation data from the Eurozone will also be closely watched..
Last week, the Nikkei Stock Average moved within the anticipated range; it remained about 1,350 points below the upper bound and about 700 points above the lower bound.
For this week, the Nikkei is expected to trade within a range defined by the 25-day moving average (currently around 66,090 yen) as the upper limit and the -2σ Bollinger Band (currently 61,050 yen) as the lower limit.
This week will be a crucial test for the Nikkei average, as it will need to see if it can rebound without falling significantly below the -2σ Bollinger Band.
