Bank of America raises year-end target forecasts for the East China Securities Index and Nikkei 225 Index

Investing.com - After U.S. banks reported stronger-than-expected third-quarter earnings for Japanese companies, they raised their year-end targets for major Japanese stock indexes, stating that the current environment supports further stock market gains. The broker currently predicts the Tokyo Stock Exchange Index will reach 4,100 points by the end of the year, and the Nikkei 225 Index will hit 61,000 points.

U.S. bank strategists Masashi Akutsu and Tetsuhiro Tokuyama stated in a report: “Third-quarter performance was strong. The number of companies raising earnings guidance has risen to the highest level in the past decade, excluding the period just after the pandemic, but guidance remains conservative.”

They added: “We expect more companies to raise earnings guidance and implement share buybacks before the full-year earnings are announced.”

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These strategists anticipate that, driven by improving fundamentals and policy dynamics, the Nikkei 225 Index will hit a new high for the fourth consecutive year. Key drivers include the Liberal Democratic Party’s overwhelming victory in the elections, accelerated profit recovery, and sustained increases in return on equity.

Political continuity has historically supported the Japanese stock market. The strategists pointed out that after similar election results in 2005 and 2012, the market rose for more than six months in a row, with valuation multiples outperforming their U.S. peers.

Earnings also continue to provide support. Among the components of the Tokyo Stock Exchange Index, 58% of companies delivered better-than-expected results in the third quarter. Market consensus forecasts show that fiscal years 2026 and 2027 will still achieve steady growth of 13% and 10%, respectively.

The strategists expect forward earnings to “continue to grow steadily.”

Regarding valuations, U.S. banks stated that as return on equity (ROE) improves, the market price-to-earnings ratio (P/E) has risen to about 17 times, surpassing previous upper limits. The strategists noted that this “indicates that the fundamental range of the P/E multiple may have shifted upward.”

They added: “This is the first time since the upward shift of the P/E fundamental range in 2013 that the P/E has risen sharply alongside a recovery in earnings per share (EPS).”

In terms of holdings, the bank expects trading to continue focusing on specific stocks, describing the current environment as “a bifurcated market with trading concentrated in certain stocks.”

Many favored stocks are related to artificial intelligence, defense, robotics, shipbuilding, and energy, but U.S. banks warn that if macroeconomic conditions change, these high-beta stocks could experience a pullback.

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