The index fell more than 5%: where was the selling concentrated?

  • As of 23 October, TOPIX was down 5.2% from its 6 October high, with 21 stocks accounting for 99% of the decline; over the same period, 13 stocks accounted for 99% of the Nikkei 225 index's decline. The drag on the indices from a small number of stocks is the clearest feature of this correction.
  • Of these 13 Nikkei 225 stocks, 12 are classified by Goldman as AI-related; Advantest, Tokyo Electron and SoftBank Group together accounted for more than two-thirds of the index's decline. Among the 21 main stocks dragging on TOPIX were 15 AI-related stocks and 5 bank stocks.
  • Goldman therefore interprets the move as risk-off selling, particularly targeting the strongest themes since the start of the year. Banks and AI both came under pressure, making the pullback broader than a single technology sector.

How widespread was foreign selling, and what was the direction of flows for the year?

  • Tokyo Stock Exchange data for September show that overseas investors from every region were net sellers of Japanese cash equities. North America and Asia ranked first and second, with net sales of 528 billion yen and 288 billion yen respectively, showing that selling pressure did not come from just one region.
  • Over the longer period since the start of the year, however, foreign investors remained net buyers of 6.5 trillion yen across cash equities and futures combined. The cash equity outflow in September and the combined net inflow for the year can coexist: recent selling pressure has been pronounced, while cumulative flows for the year remain net purchases.

Where have valuations fallen, and how much upside does Goldman still see?

  • As of 23 October, TOPIX's forward price-to-earnings ratio for the next 12 months had fallen to 14.8 times, its lowest since August 2025; the Nikkei 225 ratio on the same basis fell to 18.2 times. The price multiple investors currently pay relative to expected earnings has declined.
  • Goldman's three-month, six-month and twelve-month TOPIX targets are 4,400, 4,500 and 4,600 points respectively. Relative to the current level of around 3,966 points, these imply upside of approximately 11%, 13% and 16%, indicating that the bank retains its medium-term bullish view after the pullback.

What earnings threshold underlies the bullish view?

  • Goldman forecasts TOPIX earnings per share of 242 for FY26, up 19% year on year; market consensus is 252, up 24%. For FY27, the bank forecasts earnings per share of 267, up 10%, also below the consensus of 279, up 11%. The earnings assumptions behind its index targets are more cautious than market consensus.
  • The USD/JPY exchange-rate assumptions used in these earnings forecasts for FY26 through FY28 are 162, 160 and 155 respectively, making the exchange rate an explicit condition of the model.
  • The week following the report is set to bring the peak of second-quarter earnings disclosures: among TOPIX companies whose fiscal years end in February or March, 22% will report results, representing 27% by market capitalization. Market consensus expects TOPIX second-quarter net profit, excluding SoftBank Group, to rise 14% year on year; earnings season will allow this growth expectation to be compared directly with actual operating performance.