Japanese equities may have further room to run as demand tied to artificial intelligence bolsters corporate earnings, according to a strategy note from BofA Securities. The bank raised its year-end targets for major Japan indices, but it also warned investors that a near-term correction could follow the recent rapid advance in AI-linked shares.
Revised index targets
BofA lifted its year-end forecast for the TOPIX to 4,200 from 4,100 and increased its Nikkei 225 target to 67,000 from 61,000. The revisions reflect what the strategists described as strong earnings momentum across Japanese companies and the country’s central position in the global AI supply chain.
Earnings backdrop
The report highlighted that Japanese firms delivered stronger-than-expected full-year results. On a sector-wide basis, recurring profits among TOPIX constituents rose 12.3% year-on-year, while fourth-quarter recurring profits jumped 33.7%. Electronics, machinery and banks were singled out as primary beneficiaries, driven by accelerating AI investment, increased demand for automation and wider interest-rate spreads.
BofA noted that some Japanese firms provide essential equipment, materials and components for semiconductor manufacturing worldwide, positioning the country to capture a portion of global AI-related spending. The bank cited memory-chip maker Kioxia Holdings as an example of a company that stands to gain from the AI spending wave.
Timing risk for high-beta names
Despite the generally bullish view, BofA warned that the swift run-up in high-beta AI stocks may exhaust itself around June, which the bank pegged at roughly 40 trading days after the market’s April bottom. The strategists drew a parallel to past rallies, noting that steep recoveries have tended to stall after an initial burst of gains.
Macro and geopolitical headwinds
The report also flagged specific risk scenarios that could undermine the rally. A prolonged closure of the Strait of Hormuz could push energy prices higher and weigh on transportation and other fuel-sensitive sectors. Separately, the possibility of additional U.S. Federal Reserve rate hikes was identified as a threat to richly valued AI shares, since higher rates could raise funding costs and reduce investor appetite for growth-style equities.
Portfolio guidance
BofA recommended that AI-related firms remain core holdings for investors, reflecting the structural opportunity tied to AI spending. At the same time, the bank urged diversification into areas where earnings are improving but share-price performance has lagged. Specifically, it pointed to banks, construction, trading houses, defense and industrial machinery firms as sectors worth adding to portfolios.
Note: The analysis above reflects the contents of a BofA Securities strategy report as described in the source material. It summarizes the bank’s projections, earnings observations and recommended positioning without adding new data or forecasts.