[Weekly Report] Summary of Last Week's Stock Market and Key Topics for This Week (Week of October 19–October 23)

We have summarized the review of the Japanese and US markets for last week (closing prices from October 16 to October 23), as well as the strategy for this week, keeping in mind the upcoming central bank week (FOMC and Bank of Japan Monetary Policy Meeting) and the US midterm elections.

1. List of Weekly Performance of Major Indices

(*Trends from Friday, October 16 closing to Friday, October 23 closing)

Nikkei Stock Average: 65,324.29 yen → 62,693.16 yen (-4.03% / -2,631.13 yen)

TOPIX: 4,066.00 pt → 3,965.81 pt (-2.46% / -100.19 pt)

NY Dow: $52,002.41 → $52,215.16 (+0.41% / +$212.75)

S&P 500: 7,659.44 pt → 7,623.68 pt (-0.47% / -35.76 pt)

Nasdaq Composite: 26,140.03 pt → 25,955.34 pt (-0.71% / -184.69 pt)

US 10-Year Treasury Yield: 5.10% → 4.997% (-0.103% pt)

USD/JPY: 157.99 yen → 156.82 yen (-1.17 yen / Yen appreciation)

2. Key Topics That Moved the Market Last Week (Review)

Last week, the stock markets in both Japan and the US were weighed down by concerns over the sustainability of AI and semiconductor-related investments. Underlying this theme are two bottlenecks: the burden of capital procurement and constraints on infrastructure supply.

1. ‘Capital Burden’ and ‘Power Constraints’ Surrounding Hyperscaler AI Investment

In the US market, as the earnings season progressed, a series of news items poured cold water on growth expectations for AI-related companies. Meta Platforms (META) announced the issuance of non-voting Class C shares. While this move, aimed at capital procurement, signals the company’s intention to continue its aggressive stance on AI investment, the market received it negatively as a sign of caution regarding the financial burden and profitability associated with massive investments.

Additionally, in Tesla’s (TSLA) July-September earnings, although free cash flow turned positive, capital expenditures fell significantly below market expectations, leaving concerns about the speed of its transformation into an AI and robotics company. Furthermore, it was revealed that Microsoft (MSFT) withdrew from a UK data center project (nScale). The reason for the withdrawal is believed to be construction delay risks due to power supply constraints, highlighting the risk that the ‘physical limits of power and infrastructure’ will become a drag on the expansion of AI investment.

2. Plunge in Semiconductor Stocks and the ‘Loss of Expectations’ for the Nikkei Average

In addition to these forward-looking concerns (such as the CoreWeave shock), the earnings outlook from major semiconductor manufacturing equipment maker Lam Research (LRCX), which announced its results after the close on the 21st, fell slightly below market expectations, serving as the deciding factor. Consequently, the SOX index (Philadelphia Semiconductor Index) plunged 3.6% on the 22nd compared to the previous weekend.

This ripple effect hit the domestic market directly, and the Nikkei Stock Average experienced a severe correction, recording its third-largest drop in history (down 3,318 yen from the previous day) and falling below 63,000 yen for the first time in about three months. According to analysis by Nomura Securities, over 90% of the rise in the Nikkei Average since the ‘TSE request’ in March 2023 was due to an increase in EPS (earnings per share), and the current PER (price-to-earnings ratio) has fallen to 15.5x. This level is clearly below the lower end of the ’16-18x’ range that became established after the TSE request, meaning the premium based on expectations has already evaporated. Moving forward, a full-scale reversal in stock prices will be difficult unless ‘real EPS growth’ backed by the monetization of AI investments and labor-saving investments by domestic manufacturers is demonstrated.

3. Strategy and Caution Points for This Week

This week is the most important period of October, with the US FOMC (27th-28th) and the Bank of Japan Monetary Policy Meeting (29th-30th) overlapping, and the earnings of major US tech companies concentrated at the end of the week.

Earnings of Major US Tech Companies and the Future of Data Center Investment

Earnings from hyperscalers such as Microsoft and Alphabet on Wednesday the 28th, and Amazon on Thursday the 29th, are coming up. In addition to the status of returns on AI investments, management comments regarding the risk of data center construction delays due to the aforementioned power supply constraints will serve as a touchstone that influences the overall market trend.

US Midterm Election Scenarios and Sector Rotation

Speculation regarding the congressional composition for the upcoming November 3rd US midterm elections is intensifying. Position adjustments that account for scenario-based sector rotation are effective, such as shifting to clean energy or hospital operator stocks if the Democrats win, returning to energy, banking, or AI-related stocks if the Republicans win, or seeing capital inflows into defense stocks in the event of a divided government.

US and Japanese Monetary Policy Meetings and Increased USD/JPY Volatility

While it is highly likely that both the FOMC on the 28th and the Bank of Japan meeting on the 30th will keep policy interest rates unchanged, there is a risk that the USD/JPY pair, which is hovering in the 156 yen range, will fluctuate violently depending on the stances taken by Fed Chair Powell and BOJ Governor Ueda during their press conferences. Careful risk management, such as combining hedges, is required when holding major export stocks that are highly sensitive to exchange rates.

[Disclaimer]

This report is created solely for the purpose of providing objective information and is not intended to solicit the buying, selling, or investment in any specific securities or financial products. Please make final decisions regarding investment judgments and asset management based on your own discretion and responsibility.