Why BofA says TOPIX and Nikkei have more room to run

Bank of America analysts maintain a bullish outlook on Japanese equities, forecasting further upside for both TOPIX and the Nikkei into 2025. This positive sentiment is underpinned by strong earnings momentum, significant upward revisions to guidance following first-quarter results, and expectations for TOPIX EPS to have bottomed with a robust recovery anticipated for the next fiscal year. Although P/E multiples have risen, BofA asserts they are justified by these earnings revisions and improved visibility, particularly in AI and inflation-related sectors, despite acknowledging potential temporary slowing momentum.

Analysis

Bank of America (BofA) analysts have reiterated a bullish outlook for Japanese equities, projecting continued upside for the TOPIX and Nikkei indices into 2025. The recent record highs are viewed as fundamentally justified, driven by strong upward revisions to corporate earnings forecasts following first-quarter results. While acknowledging that P/E multiples have risen significantly, BofA contends they are supported by this robust earnings momentum. The analysis anticipates that TOPIX EPS has likely bottomed for both the current and next fiscal years, with expectations for the next fiscal year's earnings recovery being significantly higher. A key catalyst is expected from October, the start of Japan's fiscal second half, when the market's 12-month forward outlook will increasingly incorporate the stronger next-year forecast, amplifying the recovery bias. BofA also anticipates further upward guidance revisions during the upcoming interim results announcements and highlights potential for outperformance in AI and inflation-related sectors.

Key Decisions for Investors

• Investors may consider maintaining or increasing exposure to Japanese equities, given the strong, fundamentals-based bullish case on earnings growth from a major sell-side institution.
• Monitor Japan's interim earnings season for further upward guidance revisions, as this is cited as a key catalyst that could sustain market momentum.
• Consider strategically overweighting portfolios within a Japanese allocation towards AI and inflation-related sectors, which are flagged for potential outperformance.
• Be mindful that elevated P/E multiples are predicated on strong future earnings growth; any failure for this growth to materialize as forecasted presents a key risk to the bullish thesis.