Bank of America has laid out two competing scenarios for the Japanese stock market as investors monitor developments in US-Iran negotiations that the firm views as pivotal to the market’s next move.
In one scenario, the market may be forming a bottom. The bank cites two specific indicators in support of that view: the Nikkei Volatility Index moving above 50 and observable progress in position adjustments among market participants. Alongside those signals, BofA says the market has not yet priced in the potential hit to corporate earnings from prolonged geopolitical turmoil.
On valuation and fundamentals, Bank of America notes that the TOPIX price-to-earnings ratio remains on the high side, but that elevated multiple is underpinned by an improving return on equity. The firm also points to flows: foreign buying in the cash market has not materially retreated, and retail investors are continuing to rotate into higher-risk assets.
Taken together, these observations form the basis of BofA’s medium-term view that Japanese equities could resume an upward trajectory once concerns tied to the Middle East peak and begin to abate. The bank specifically highlighted April as the period most likely to represent a turning point for the market.
At the same time, Bank of America cautions that the same set of trends could allow for additional near-term supply-demand adjustments. In other words, even if the medium-term outlook turns constructive, the market may still experience short-term volatility as buyers and sellers rebalance positions.
The firm’s note frames a contingent outlook: the market’s next phase depends heavily on the course of international negotiations and on how quickly earnings expectations are revised to reflect continued regional instability. Until those elements clarify, the bank sees both a case for a market trough and a pathway for further short-term adjustments.
Key points
- BofA identifies a potential market bottom supported by the Nikkei Volatility Index rising above 50 and position adjustments.
- TOPIX valuations stay elevated but are backed by rising return on equity; foreign cash-market buying has not markedly declined and retail investors are rotating into risk assets.
- April is highlighted as the most likely turning point if Middle East-related concerns peak and subside.
Risks and uncertainties
- The outcome of US-Iran negotiations is unresolved and is likely to determine near-term market direction - this impacts equity performance across Japanese sectors.
- Corporate earnings may not yet reflect the effects of prolonged geopolitical turmoil; revisions to earnings could pressure valuations, particularly in export-sensitive and cyclical sectors.
- Short-term supply-demand imbalances could persist, introducing continued volatility even if a medium-term recovery scenario materializes.