Japanese Equity Market

In October, the domestic stock market experienced significant volatility and an overall decline. This was driven by factors including rising global interest rates, higher crude oil prices—exacerbated by growing uncertainty regarding the situation in the Middle East—and concerns surrounding the financing and deteriorating financial health of "neo-cloud" companies. AI- and semiconductor-related stocks were particularly affected. Toward the end of the month, the market saw a brief rebound following news of an upcoming IPO for a U.S.-based AI development firm; however, this was short-lived, as a major U.S. semiconductor company issued a revenue forecast that fell short of market expectations. Ultimately, the Nikkei Stock Average ended the month with a decline of 5.19%.

At the beginning of the month, the market rose, supported by a cooling of expectations for further interest rate hikes in the U.S. Soon, however, concerns over global inflation and heightened geopolitical risks led to a broad sell-off, particularly affecting cyclical stocks, as well as the financial and automotive sectors. From the middle to the latter part of the month, the market remained on a downward trend—led by the AI- and semiconductor-related stocks that had previously been the primary drivers of growth—as credit and financial concerns surrounding emerging U.S. AI-focused cloud companies rippled through the market. Nevertheless, the downside was cushioned by a rotation of capital into domestic-demand-oriented and defensive sectors; real estate stocks benefited from a decline in domestic long-term interest rates, while the retail and pharmaceutical sectors saw gains supported by strong earnings results.

Toward the end of the month, a prominent U.S. company specializing in cutting-edge AI development released a prospectus for its initial public offering (IPO). This helped alleviate excessive caution regarding the future of AI, leading to a rebound in previously sold-off AI- and semiconductor-related stocks. However, the market subsequently fell again after a major U.S. semiconductor company’s revenue forecast missed market expectations.

By sector, gains were seen in services, mining, and pharmaceuticals, while non-ferrous metals, machinery, and banking experienced declines.

While concerns regarding inflation, interest rate trends, and the financial instability of emerging U.S. AI companies may weigh on the market, the resolution of uncertainties surrounding the U.S. midterm elections—combined with strong recent corporate earnings—should provide a floor for prices, leading to a modest gain.

Persistent macroeconomic concerns remain a drag on stock prices. Although the Federal Open Market Committee (FOMC) kept policy interest rates unchanged at its late-October meeting, the ongoing threat of high inflation and the prospect of further rate hikes continue to exert "risk-off" pressure on the market.

Meanwhile, the U.S. midterm elections are the primary focus. Should the Democratic Party secure control of both the House and the Senate—a "blue wave"—it would result in a "divided government" vis-à-vis the Republican administration of President Trump. While this might be viewed negatively in the short term, it could also lead to the scaling back of aggressive policies currently championed by the administration, such as tariff hikes and significant additional tax cuts. Consequently, expectations that fiscal expansion might be reined in—thereby easing upward pressure on long-term interest rates—could improve investor sentiment and trigger a shift toward a "risk-on" environment.

Furthermore, domestic earnings reports for the July–September quarter have shown resilient performance, with many companies announcing upward revisions to their forecasts. As investors recognize that current valuations are attractive—supported by solid earnings—the market may transition toward an "earnings-driven" phase. As for AI and semiconductor-related stocks, which declined last month, a broad-based recovery remains unlikely given lingering concerns over the financial stability of certain emerging U.S. AI cloud companies. Nevertheless, as excessive caution subsides and strong individual corporate results become apparent, we anticipate a rebound—supported by "buying on the dips"—that will lead to a modest overall rise in the market.