Bank of America raises index targets
Bank of America has revised upward its year-end projections for Japan's principal stock indices following robust third-quarter results. The brokerage now expects TOPIX to finish the year at 4,100 and the Nikkei 225 at 61,000.
Strategists' assessment of Q3 and near-term outlook
In a note, BofA strategists Masashi Akutsu and Tetsuhiro Tokuyama described third-quarter results as strong and highlighted a notable jump in the number of companies lifting guidance. "3Q results were strong. The number of companies that raised guidance rose to the highest level in the past 10 years, excluding the period right after the pandemic, but guidance is still on the conservative side," they wrote. They added: "We anticipate more upward revisions to guidance and share buybacks prior to full-year earnings announcements."
Drivers behind the forecast upgrade
The strategists point to a combination of improving corporate fundamentals and policy dynamics as the foundation for further gains in the Nikkei 225, which they expect to reach a fresh high for the fourth consecutive year. They identified several key drivers - the Liberal Democratic Party's landslide election victory, a faster earnings recovery and a sustained increase in return on equity - as underlying supports for the broader market.
According to the strategists, political continuity has been supportive for Japanese equities historically. They noted that after comparable election outcomes in 2005 and 2012, equities rallied for more than six months and valuation multiples outperformed U.S. peers.
Earnings trends and consensus expectations
Earnings momentum is cited as another pillar for the upgraded outlook. Among TOPIX constituents, 58% of companies posted positive surprises in the third quarter. Consensus estimates still point to solid earnings growth of 13% in fiscal 2026 and 10% in fiscal 2027, and the strategists expect forward earnings to "continue to increase steadily."
Valuation and P/E dynamics
BofA observed that the market price-to-earnings ratio has climbed to about 17x, breaking the previous ceiling and moving in step with improving return on equity. The strategists said this development "suggests the fundamental range for P/E multiples may have shifted upward." They further commented: "This is the first time since 2013, when the fundamental P/E range shifted upward, that the P/E has increased sharply while EPS has also recovered."
Market positioning and concentration risks
On positioning, the note describes the market as polarized, with trading concentrated in a limited set of names. BofA characterized the current environment as a "polarized market where trading is concentrated in specific stocks." Many of the bank's preferred names are linked to AI, defense, robotics, shipbuilding and energy. However, the strategists cautioned that these higher-beta stocks could experience pullbacks if macro conditions shift.
Bottom line
Bank of America's adjustments reflect confidence in an earnings rebound, durable improvements in ROE and political continuity that the strategists view as supportive. The firm expects additional corporate guidance upgrades and buybacks ahead of full-year results, while flagging that market leadership remains narrow and vulnerable to macro swings.