J.P. Morgan: Japanese equity valuations fall below 15 times; AI rebound depends on oil prices and monetization prospects

Why did Japanese equities pull back sharply in October?

In October, the TOPIX fell 3.5%, the Nikkei 225 fell 5%, and the Nikkei semiconductor index fell 15%; over the same period, the S&P 500 fell only 0.9%.
Concerns about commercial AI monetization and the creditworthiness of emerging cloud computing companies weighed on semiconductor stocks. Funds shifted from cyclical stocks driven by AI and overseas demand to domestic-demand defensive sectors such as pharmaceuticals, transportation and food. High-dividend, low-volatility and quality factors performed well.
JPMorgan believes earnings prospects for Japanese semiconductor companies remain strong and earnings guidance continues to be revised upward. However, sector valuations are also influenced by the global AI ecosystem, and the market is watching whether major cloud providers can achieve stable monetization and returns on investment in 2027–2028.

As of 30 October, the TOPIX forward 12-month price-to-earnings ratio had fallen to 14.7 times, below JPMorgan’s assumed range of 15–18 times but still above the median of 13.7 times since 2012. On that basis, the bank believes Japanese equities have entered oversold territory.
Earnings expectations, meanwhile, have improved: the IBES consensus for year-on-year TOPIX earnings-per-share growth in fiscal 2026 rose from 11% to 21%. JPMorgan expects compound annual earnings-per-share growth of 15% over fiscal 2026–2028.
The bank raised its TOPIX earnings-per-share forecasts for fiscal 2026 and 2027 from 242 yen and 278 yen to 250 yen and 289 yen, respectively. It also lowered its assumed price-to-earnings ratio from 17 times to 16.5 times, while maintaining its end-2026 targets of 4600 for the TOPIX and 75000 for the Nikkei 225.

Bloomberg consensus expects revenue at TOPIX 500 companies to grow 9.4% year on year in fiscal 2026, above approximately 3%–4% in fiscal 2024–2025. External demand, domestic demand and materials and resources are expected to contribute approximately 3.5, 2.6 and 2.7 percentage points, respectively.
On the same basis, operating profit and net profit are expected to grow 25.3% and 34.7%, respectively, in fiscal 2026. About eighty percent of the increase in manufacturing profits comes from margin improvements driven by higher semiconductor prices; domestic-demand industries benefit from implemented price increases, slowing cost inflation and improved capacity utilization.
Growth is not expected to remain at its fiscal 2026 pace: consensus forecasts revenue growth to slow to around 4% in fiscal 2027–2028, while net profit growth falls to 13.6% and 9.4%, respectively. JPMorgan believes domestic-demand industries could continue to support overall margins after manufacturing’s phase of rapid growth.

JPMorgan uses two Brent crude scenarios, at 70 dollars and 100 dollars per barrel, to distinguish potential near-term paths. If oil prices move toward 70 dollars, AI semiconductor and equipment stocks could recover relatively quickly; if they move toward 100 dollars, corporate earnings would come under pressure and energy and domestic-demand defensive stocks would have an advantage.
Even with solid earnings, memory chip stocks may recover more slowly: the bank notes that the buildup of balances in Korean leveraged ETFs poses a headwind. In the near term, it places greater emphasis on selecting stocks based on earnings in IT services, internet and domestic-demand defensive sectors.
Medium-term support comes from changes in household asset allocation: as of the end of June 2026, cash and deposits had fallen to 45% of Japanese household financial assets, and JPMorgan expects the share to fall to 35% by fiscal 2028. The bank assumes that roughly half of the funds shifted out will go to Japanese government bonds and the rest to investment trusts and domestic equities; investment trusts allocate about eighty percent to foreign equities.
The bank expects higher interest and dividend income to support household consumption. For banks, the concentration of deposits at large banks helps improve pricing power. JPMorgan maintains a structural overweight in banks and continues to favor IT services, capital goods and domestic-demand sectors after market sentiment normalizes.