CPI and jobs data, not Jackson Hole, will determine the Fed’s course
Investing.com -- Bank of America Securities sees room for Japanese equities to advance into year-end, pointing to three supportive catalysts even as markets pause after strong gains in early August.
The first driver is earnings expectations. Analysts argue that earnings per share (EPS) forecasts are likely near a bottom after companies reported stronger-than-expected results in the first quarter but issued conservative guidance.
“We believe this suggests that downward revisions to EPS forecasts have almost ended, while implying upward revisions to guidance along with first half (1H) results and improvement in EPS forecasts thereafter,” BofA strategist Masashi Akutsu said in a note.
The second factor is macroeconomic. Expectations are rising for inflation and a domestic recovery, underpinned by fiscal policy that looks set to remain expansionary regardless of the political outcome.
The Bank of Japan has not indicated plans for rapid rate hikes, and together with government spending this backdrop is “fueling expectations for inflation and a recovery in the domestic economy.”
Stronger-than-expected nominal GDP growth announced on August 15 reinforces that view.
The third catalyst is a recovery in returns. BofA highlights that return on equity (ROE) is improving, aided by seasonal factors such as an increase in buybacks and management buyouts around the October–December reporting season.
Japanese companies are also continuing to restructure, and the strategists expect “ROE improvement driven by reductions in shares outstanding, listed companies, and unprofitable businesses,” a dynamic they believe will support the market further.
That said, risks remain, particularly from U.S. developments. The strategists note that the TOPIX price-to-earnings (P/E) ratio has climbed to 15.5 times, the same level reached before a correction in March 2024.
With U.S. financial conditions and inflation data still pivotal for global markets, they caution that shifting expectations for Federal Reserve policy could again weigh on Japanese valuations.
BofA says Powell’s Jackson Hole speech and upcoming U.S. data will guide market expectations.
If higher inflation only delays Fed cuts without triggering recession fears, the downside for Japanese equities should be limited, with bank stocks and yen depreciation offering support while the three positive catalysts stay in place.