Japanese Stocks to Refocus on Fundamentals by Year-End, Citi Says

Japanese equities are expected to pivot back toward fundamentals-driven performance by the end of the year, according to analysts at Citi, after a third quarter where such factors were largely ignored by the market.

A Quarter of Disconnect

In a recent note, the bank observed that Japanese stocks traded within a range from July through September, a period when fundamentals-related factors like earnings forecast revisions and EPS growth turned sharply negative. This marked a departure from the typical market behavior for this time of year, when investors usually focus more heavily on corporate results between first-quarter and first-half earnings seasons.

Citi attributed the third-quarter disconnect to several overriding thematic and macroeconomic pressures. The bank highlighted a combination of factors that temporarily overshadowed corporate earnings, including:

• The premature pricing-in and subsequent reversal of strong results for stocks in the AI and semiconductor sectors.
• A steepening yield curve.
• Rising crude oil prices.

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Outlook: A Return to Fundamentals

Looking ahead, the firm anticipates these "one-off" factors will likely fade as the year concludes. This should allow the market to return to an environment where fundamentals regain their traditional influence on valuations.

Citi stated that the same fundamentals-related drivers that proved ineffective in the third quarter are expected to dictate share price performance once again in the Japanese equity market heading into year-end.