Nomura says Japanese stocks may stay vulnerable to a risk-averse mood even after record corporate profits, because much of the first-quarter earnings beat came from one-off factors. The brokerage still expects the TOPIX and Nikkei 225 to climb further through 2028, backed by earnings growth and record shareholder returns, but warns that stretched valuations and a "bad" rise in interest rates are the main risks.
Japanese stocks may remain vulnerable to a risk-averse investor mood despite record corporate profits, Nomura said in a sector outlook published Friday, as markets weigh how much of the recent earnings strength can be sustained.
Recurring profit growth came in at around 50% in fiscal 2026 first-quarter, well ahead of the 25% growth expected by consensus, according to Nomura. Return on equity reached a record 12.1%. Operating margins rose to an all-time high of 9%. But the brokerage said investors remain cautious because roughly half of the profit outperformance came from one-off factors, including foreign-exchange gains, tariff refunds and inventory valuations, while the other half was supported by underlying factors such as higher volumes and price increases.
TOPIX hits highs while Nikkei lags
That distinction helps explain why strong earnings have not always translated into equally strong share-price gains. The TOPIX has continued to reach new highs, while the Nikkei 225 has struggled to regain its late-June peak, Nomura said, attributing part of the divergence to investor caution following the sharp run-up in AI and semiconductor-related shares earlier in the year.
Valuations add to the caution: Nomura said the TOPIX trades at around 16-17 times earnings, while the Nikkei 225 trades at about 22-23 times, both above historical ranges. The brokerage nevertheless argues Japanese stocks still have room to rise because earnings revisions remain supportive, and it expects the TOPIX to reach 4,400 by the end of 2026, 4,600 by the end of 2027 and 4,800 by the end of 2028, with the Nikkei 225 at 70,000, 73,000 and 76,000 over the same periods.
Earnings and buybacks support the bullish case
Nomura raised its TOPIX earnings-per-share forecasts to 244 for fiscal 2026, 269.1 for fiscal 2027 and 287.2 for fiscal 2028, implying growth of 19.2%, 10.3% and 6.7%, respectively. The brokerage also sees strong shareholder returns supporting demand, forecasting total dividends of ¥31.6 trillion and share buybacks of ¥24 trillion for fiscal 2026, taking total shareholder returns to ¥55.6 trillion, up 23.3% year over year.
Monetary policy remains a potential source of volatility, though Nomura does not currently see the Bank of Japan tightening enough to materially damage earnings or the economy. It assumes a terminal BOJ rate of 1.75% and says financial conditions remain accommodative in Japan.
The bigger risk, Nomura said, is a "bad" rise in interest rates. Japan's nominal GDP growth remained above 10-year Japanese government bond yields in the latest data, preserving the favorable gap between economic growth and long-term rates that supports equities. But because that gap is relatively narrow, a sharp increase in yields could undermine the market's valuation support.
Source: Investing.com
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