J.P. Morgan: Japanese stocks hit by AI sell-off, earnings growth base continues to broaden

Where have Japanese stock valuations fallen to after the AI sell-off?

After preliminary results of the US midterm elections were released, concerns that investment in AI data centers could be curtailed weighed on Japanese AI and semiconductor stocks, and the selling pressure subsequently spread. On 4 November, the Nikkei 225 Index closed down 1.6%, while TOPIX fell 0.89%.
That day, TOPIX’s P/E based on IBES consensus earnings forecasts for the next 12 months fell to 14.4 times. This was at the median level for Japan’s deflationary period and below the 15–18 times range that JPMorgan considers reasonable. The bank therefore judged Japanese stocks to be oversold, citing the medium-term earnings outlook, a broadening growth base, and easing domestic macroeconomic concerns.

At the time of the report, about thirty percent of results for the period from month 7 through September had been reported. Companies that had disclosed results recorded year-over-year growth of 16% in revenue and 30% in net profit. Semiconductor equipment, testing equipment, and major suppliers of multilayer ceramic capacitors performed strongly.
Growth was also seen in materials, real estate, trading companies, construction, and pharmaceuticals. Excluding electronics and precision-instrument companies with especially strong results, as well as electric power and gas companies with weak performance, companies that had disclosed results still recorded year-over-year growth of 10% in revenue and 11% in net profit.
JPMorgan believes that passing on costs, balance-sheet adjustments, capital expenditure, and the expanding effects of investment are helping non-AI sectors improve margins. The bank expects domestic-demand, materials and resources, and financials to also contribute to medium-term earnings growth.

Growth is uneven: the auto sector has been affected by a slowdown in China and rising semiconductor costs; retailers face greater price sensitivity among consumers amid inflation and poor weather; and food companies face higher costs from elevated oil prices. All three sectors saw revenue rise while profits fell.
As of 4 November, only 48% of TOPIX companies whose reported net profits exceeded the Bloomberg consensus estimate had done so. JPMorgan expects this proportion to improve as better-performing financial companies report results.

As of 4 November, TOPIX companies had announced share buybacks totaling 2.3 trillion yen since October, significantly above the average of about 1 trillion yen for the same period over the past five years.
Buybacks announced so far in fiscal 2026 have already exceeded 15.3 trillion yen, a record high for the same period; the number of companies raising their per-share dividend guidance has also continued to increase. JPMorgan believes this reflects a structural strengthening of Japanese companies’ focus on shareholder returns.